The Housing Bubble

A report from the Arizona Republic. “The deepening residential housing slump continues to hammer Scottsdale home builder Meritage Homes Corp. The company reported Thursday that it lost $56.6 million in the second quarter as home closings slid 32 percent and revenue dropped 37 percent. ‘Weakened demand and increased price incentives have resulted in lower margins on homes sold and more write-offs on remaining inventories,’ Meritage CEO Steven Hilton said in a statement.”

“Hardest hit were Meritage subdivisions in Nevada where sales dropped 69 percent, followed by Arizona with a 58 percent decline and California, where sales fell 52 percent.”

“The company said slow demand and a high number of contract back-outs reduced the value of new home orders by 28 percent. Arizona led the decline with a 37 percent drop in orders, followed by California, down 35 percent.”

“Increasing numbers of newer Chandler homes are being abandoned by cash-strapped owners, leaving weeds, green pools and headaches for neighbors and city officials.”

“‘It’s scaring me,’ neighborhood services Sgt. Greg Carr said of the trend. ‘We’re trying to figure out how we can approach this, who do we call when homeowners walk away and we can’t find them?’”

“Carr doesn’t have statistics but said home foreclosures are rising and along with them code violations. His counterparts in Mesa, Gilbert and Peoria said the phenomenon is affecting those municipalities, too.”

“A significant portion of the recent Chandler complaints are from newer neighborhoods in southeastern parts of the city where homes once sold for $400,000 or more and values have dropped, Carr said.”

“‘It started ramping up during the past six months and I don’t see it stopping any time soon,’ said Ray Villa, acting neighborhood services director for Mesa. ‘We’re getting between five and 10 complaints a week that someone has walked away from a property and is letting it deteriorate,’ he said.”

“Villa, who lives in Queen Creek, said one of his own neighbors packed up and left a house. ‘It’s all over the place,’ he said.”

“Bill Patena, neighborhood services supervisor for Peoria, said he sees a connection between new subdivisions, ‘exotic’ mortgage-lending programs and abandoned homes.”

“‘I don’t think it’s out of control, but we have seen an increase in people abandoning their homes’ especially in the newer parts of north Peoria, he said.”

The East Valley Tribune from Arizona. “Valley builders and homeowners alike are continuing to struggle in an over-saturated real estate market, as buyers wait to see if prices will keep falling.”

“Two studies released this week show continued weakness in sales of newly built homes in the Valley and existing Pinal County homes. Some 2,988 new Valley homes were sold in June, compared with 4,348 during the same month last year, the latest Phoenix Housing Market Letter by analyst RL Brown shows.”

“Large inventories of both new and existing homes are still hurting the market, Brown said. More than 50,000 existing homes are currently for sale in the Valley.”

“‘There’s a lot of people who would buy if they could get rid of their present house,’ he said.”

“Despite the slump in sales, builders began ramping up production on speculative homes earlier this year, likely anticipating buyers returning to the market, said Ben Sage with research firm Metrostudy.”

“That hasn’t happened. ‘It means they’re going to continue to have inventory they need to get rid of,’ he said. ‘It’ll keep downward pressure on prices.’”

“Sellers are competing with investors and builders, who are trying to off load homes, said real estate agent Jason Hall in Chandler. Builders are getting cancellations, which adds to the housing inventory, Hall said. They can afford to cut prices by tens of thousands of dollars, while homeowners can’t, he said.”

“‘They’re the ones with the deep pockets,’ he said. For now, sellers need to keep lowering their prices, and if they can’t, they shouldn’t sell, Hall said. ‘Pay the bill and keep making the drive,’ he said.”

In Business Las Vegas from Nevada. “Homebuilders are slashing prices in the Las Vegas Valley, and KB Home has taken it a step further by announcing plans to introduce smaller models in its master-planned communities to jump-start sales by focusing on affordability.”

“Builders had emphasized incentives to lure buyers, but KB and builders have cut prices in the valley as part of a push toward affordability. So far this year, SalesTraq reports that the median price of new homes has dropped more than 7 percent to $318,807.”

“The median price of new homes surpassed $355,000 in May 2006. Home Builders Research reported new home prices in June were down 9 percent from June 2006.”

“‘You are still seeing incentives, but more and more what it’s coming to is that it was price all along,’ said local housing analyst Steve Bottfeld.”

“Amid a record level of inventory, the price cuts by builders create more competition for homeowners. Some analysts suggest that could further prompt homeowners to cut their prices.”

“Dennis Smith, president of Home Builders Research, said it’s not uncommon to see reductions of $25,000 to $30,000 on a $400,000 house.”

“‘There are a lot of deals out there. They are trying to sell houses. They want to get people motivated to buy a house. At this point, generally speaking, I would say it’s not working as well as they would like,’ Smith said.”

“KB has slashed prices in Mountain’s Edge, where buyers are now paying between $218,000 and $248,000 for its smallest models, down from the $269,000 to $290,000 it had been charging.”

“The 25,000-plus homes on the resale market has impacted builders to make reductions, according to Jim Widner, regional general manager of KB Home. Until all builders are willing to adjust their prices, it forestalls buying.”

“The lowering of prices by builders often leads to complaints from homeowners who bought at a higher price point weeks or months earlier. ‘It is always disappointing to pay for something and the price goes down,’ said Renee Gervais, the KB vice president of sales and marketing. ‘When you have an oversupply of homes on the market, people are not willing to overpay. They have all kinds of choices out there.’”

“KB said it’s sold about 60 homes in Inspirada since the end of March with the town homes and garden homes. ‘We would like it to be a little bit faster but given the market conditions, it is outselling anything in Inspirada, said Widner.”

“Toll Brothers recently opened four of the five models it’s selling and has made 17 sales through the end of last week, said group president Gary Mayo. He said everyone had different expectation of sales two years ago when the market was hot, but he said the sales at Inspirada are in line what’s happening elsewhere in the market, not any better or worse.”

“‘I think what’s going on is the market purely driven by a lack of consumer confidence,’ Mayo said.”

“Robbie Graham knows the title business from the ground up. Graham who has been with Nevada Title Co. since its infancy nearly 30 years ago, is the company’s president.”

“Q: How has the housing slowdown affected your company? A: ‘Residential resales are off between 37 percent and 40 percent. The homebuilding area is down dramatically…plus the subprime market, that has had a real effect on every title company. When you have individuals that were only making loans and getting homes because they could finance something 100 percent of the time, that takes a lot of people out of that buying area.’”

“Q: What caused the housing slowdown? A: ‘We had a lot of investors that came in and invested in Las Vegas, just an incredible number of people. I don’t know the exact percentage, but of the 26,000 homes that are on the market, you have got in the neighborhood of 9,000 or so that have never been lived in.’”

“‘Those are homes in which people came in and made that investment because the prices were going up. There was some false sense of what was happening because the subprime market allowed everybody to get into that market. Then what happened is it gets to a certain level, it stopped being affordable and working in this market.’”

“‘We are blessed with having industries such as the gaming industry, but at the same time there are a lot of blue-collar workers who are the backbone of making that industry work who aren’t in a place to afford $350,000 or $400,000 (homes).’”

The Las Vegas Business Press from Nevada. “Those awaiting the arrival of a new Conrad/Waldorf-Astoria condo-hotel on the Strip will have to wait a while longer. Developer Lorenzo Doumani recently announced that the high-rise is on hold.”

“‘We will have an announcement in October,’ said Doumani, CEO of Majestic Resorts, who declined to elaborate further.”

“The project has had a long and bumpy ride. The Conrad-branded luxury condo-hotel project was first announced in February 2004. The glass skyscraper was originally supposed to open last year. Three and a half years later, the 5.5-acre-site still sits vacant.”

“Doumani retains one advantage; cheap land. Lorenzo’s grandfather acquired the property 50 years ago for $95,592 an acre. Regardless, it still may not be enough to build the project.”

“‘The strongest time to market and create project interest is when it’s first announced,’ said Bruce Hiatt, owner of a Las Vegas residential high-rise specialty firm. ‘The slowdown in Miami has people doing more due diligence. In this market, you have to show progress. People want to see it’s real.’”

Readers suggested a topic on analysts and the housing bubble. “One thing that interests me a lot about this bubble is the practice of ‘excuse-onomics’ in market analysts’/economists’ reports. Whereby 99 percent of their data point strongly to one conclusion (a housing bubble, a credit bubble, P/E ratios out of whack, etc etc), yet they grasp for and emphasize that one small piece of data that could possibly indicate otherwise.”

“What this seems to indicate is analysts lodged deeply in the pocket of Wall St., but of course that is another weekend topic suggestion.”

One wrote, “The problem is CYA. As a public economist, you get villified if you manipulate the markets, regardless of if you are right. Few economists would rant about the housing bubble in 2005 even if it was clear to the rest of us. Alan Greenspan himself could have called it a bubble and people would keep on buying houses, and once the music stopped, those without chairs would blame HIM for stopping the music, not general economic overbuilding.”

“The housing bubble collapsed of it’s own weight, as was always the outcome, and now economists are just starting to talk about it.”

Another said, “A recession looks likely and I hope that’s all it will be. I wanted the bubble to deflate or pop, so I could get a cheap house for cash. But I do not want a depression.”

A reply, “You will be able to find that cheap house for cash in due time. I bought one in the Tampa Carrolwood Village area in 1991 that was forclosed during that downturn in RE for $85,000. It was built three years earlier and the people that lost it paid $142,900. It worked for me and it will work for you, just let this mess cycle through it’s course.”

One shared this, “My dad has considered me a doom and gloomer for a while now. However, he has recently seen the light (I think). It seemed evident to me as we were driving around Lancaster, PA earlier this week. That’s an Amish area. I said, ‘The Amish have the right skills and lifestyle to make it through a recession.’”

“Normally my dad would snap back something like, ‘What are you talking about recession? There’s no way that will happen.’ This time, however, he said, ‘Yeah…they won’t skip a beat.’ Acceptance.”

One pointed to a recent report, “Inspired by this whipsaw of a Zandi report, in which he proceeds to tick off a bunch of reasons why the economy is near crisis, then up and predicts no recession because ‘employment figures’ will be good.”

One agreed, “I don’t get this Zandi guy. One moment he seems to make sense and then comes a comment like the one about employment.”

From the MarketWatch article, “The problems in the U.S. subprime mortgage market could spiral out of control into a global financial crisis, economist Mark Zandi said.”

“With a ‘high level of angst’ in the financial markets about who will take the losses from more than $1 trillion in risky mortgages, we could be just one hedge-fund collapse away from a global liquidity crisis, said Zandi, chief economist for Moody’s Economy.com.”

“‘Mounting mortgage delinquencies and defaults now pose the most serious threat to the global financial system and economy,’ Zandi said in his report.”

“‘If there is a fault line in the global financial system, it runs through the U.S. housing and mortgage markets,’ he said.”

“Here are some highlights of his forecast, based on a study using anonymous data collected by consumer credit agency Equifax: Home prices will fall 10% from the peak nationally, more in the bubble regions in California, Florida, Nevada, Arizona and Washington, D.C.”

“Home sales could bottom later this year, home construction could bottom early next year, and house prices could bottom late next year. It’ll be 2010 before the housing market could be termed ‘normal.’”

“About 17% of total mortgage debt is at risk, totaling about $2.5 trillion in subprime, Alt-A and jumbo debt. About $1.4 trillion is at serious risk of default. Investors will lose about $113 billion as $460 billion worth of mortgages default.”

“As for the U.S. housing market, Zandi expects a lot more pain, but not a recession.”

From CNN Money. “‘The ultimate outcome of the decline in mortgage credit quality is not wholly predictable,’ Moody’s Economy.com said in a July 26 report. While there are efforts being made to forestall the surge in foreclosures, ‘the downside risks outweigh the positives,’ the report said.”

“America’s era of easy money is going out with a bang - and on a global scale. ‘The fact is we live in a general equilibrium world,’ said Paul Kasriel, chief economist at Northern Trust. ‘Everything affects everything else and [the U.S. housing slowdown] is spreading to other parts of the economy and the credit markets.’”

“One of the latest bursts of market anxiety came on Thursday with news that a second Australian hedge fund, this one partly owned by Dutch financial-services giant ABN Amro, has also has run into trouble because of its exposure to U.S. subprime mortgages.”

“‘This is a global problem,’ said T.J. Marta, fixed-income strategist at RBC Capital Markets. ‘Optimists say that because the markets are global we are spreading out the gain, but also spreading any losses.’”

“‘Pessimists say that the issue will hit a psychological tipping point and because it is a global problem it will be felt broadly in many places,’ he said.”

“Central banks across the globe, but most crucially in the U.S., Japan and Europe, had cut interest rates to historic lows five years ago, in a bid to jumpstart their economies after the slump of 1990s equities bubble and years of deflation in Japan.”

“Low rates encouraged borrowers of all stripes and created a surge in global liquidity, which first helped fuel spectacular gains in assets, not least of which was the U.S. housing market bubble.”

“But rising interest rates across the globe in recent years have finally started to take their toll, economists believe. Previous campaigns to lift interest rates have typically led to financial debacles of one form of another.”

“For now, markets on Wall Street are only beginning to price in some…worst-case scenarios. ‘We have had global hedge funds, private equity and U.S. stocks driven higher by cheap credit,’ Kasriel said, ‘and all that is changing now.’”

The Ledger reports from Florida. “Polk County’s existing home sales dropped for the 13th consecutive month. June’s total fell nearly 40 percent from 554 in June 2006 to 333. It is the county’s longest sales drought since The Ledger began tracking home sales in 1994. ‘There’s just so much more to pick from,’ said Linda Jackson, a Realtor in Lakeland.”

“It is estimated that local builders have an inventory of about 5,000 new homes. Median home prices suffered along with sales last month. For Polk, prices dropped 5 percent from $183,900 in June 2006 to $175,300 last month.”

The Orlando Sentinel from Florida. “The number of individuals and families moving into new homes in Orlando-area subdivisions plunged 26 percent during the second quarter, and home builders continued to slam on the brakes.”

“And despite efforts by builders to entice buyers with discounts and deals, more than 5,600 new homes still sit empty in the Orlando area, a research company reported.”

“‘The Orlando MSA [metropolitan statistical area] is experiencing the same problems many Florida markets are experiencing, large new- and existing-home inventories,’ said Anthony Crocco, director of Metrostudy’s Central and Northeast Florida divisions. ‘The high percentage of finished, vacant inventory remains a major concern.’”

The Palm Beach Post from Florida. “Lenders once eager to extend credit are seeing mortgage defaults pile up and are tightening loan standards in response. That has kept people from moving into vacant homes - and there are lots and lots of vacant homes. In St. Lucie County alone, according to Metrostudy, 1,368 finished homes stand empty.”

“At the annual rate of buyer move-ins, it would take 9.5 months before St. Lucie would fill its roof-and-mortar inventory. Yet during the second quarter, builders started work on another 205 homes.”

“Not everyone is optimistic. Centex recently opted out of a planned 800-acre, 1,650-home development in Martin County. Developers in Palm Beach County also are building less. The second quarter’s 423 new housing starts represent a 71.8 percent decrease from the second quarter of 2006.”

“The pool of available buyers also is drying up: 1,143 buyers moved in during the second quarter of this year, down 29.6 percent compared with the second quarter of 2006.”

From TC Palm in Florida. “A glut of new but vacant homes continues to dominate the landscape of the central and northern portions of the Treasure Coast, a housing report suggested.”

“Metrostudy reported 2,391 homes were completed in St. Lucie and Indian River counties during the past three months, and they still have no occupants. At the current pace of people buying homes and moving in, it should take about nine months to fill the St. Lucie County inventory and 13 months in Indian River County, according to Metrostudy.”

“Jack McCabe, CEO of McCabe Research and Consulting, said subdivisions with an overabundance of vacant new homes and ‘For Rent’ signs may be deterring renters from becoming home buyers, further pushing up local inventory levels.”

“‘Some of the homes are sitting out there with weeds, without air-conditioning, maybe even growing some mold,’ McCabe said. ‘If I am buying a house, I want to buy in the community with swing sets and bicycles on the street, not where it’s empty and I’d be taking a risk.’”

“Don Santos, past president of the Treasure Coast Builders Association, wasn’t surprised at the statistics in the report. ‘Unfortunately these are a high count, which reinforces the fact that builders overbuilt inventory,’ Santos said. ‘But there’s never been a better time to buy.’”

The Miami Herald from Florida. “Ocean Bank, the largest commercial bank chartered in Florida, lost $33.7 million in the second quarter after taking losses on real estate loans that had gone bad. The red ink at Ocean Bank was a further sign that Florida’s real estate problems have begun to spill over into the rest of the economy.”

“Ocean Bank, which lent heavily in the condo market, said the bank increased its loan loss reserves to $77.5 million in June.”

“In June, Ocean Bank filed a foreclosure notice in Palm Beach County against six individuals and NRW Development, a South Florida real estate development firm, which held $50 million in unpaid loans on a Boca Raton condo conversion project. Other problem loans involved Hialeah condo converter Puig, which filed for bankruptcy protection last month.”

“Miami bank analyst Ken Thomas said the losses at Ocean Bank were an indication of tougher times for the banking sector. ‘This again is a sign that the good times in banking are gone,’ he said. ‘It’s one thing to report decreased earnings like BankUnited and BankAtlantic did in recent days. It’s another to report a loss.’”

“Both BankUnited and BankAtlantic, big Florida thrifts, announced declines in quarterly profits this week. Ocean Bank’s loss, Thomas said, signals that the impact of the troubled real estate market will continue to ripple through the economy.”

From Bay News 9 in Florida. “The foreclosure rate in Pinellas County is soaring, experts say. ‘If you look at the properties in one new construction project in St. Petersburg, you will see that nine out of 56 townhomes have had court action filed by the lenders, which normally indicates pre-foreclosure activity,’ said real estate agent Roger Buchanan.”

“The recently built upscale properties are listed for between $500,000 and $800,000, and share the same 33705 ZIP code as part of Midtown, Buchanan said.”

“Investors who sunk large amounts of money into new developments are now feeling the burn since the market has changed so drastically.”

The Independent Mail from South Carolina. “You’ve found the house you want but can’t seem to sell the one you have. It’s become an all-too-familiar problem for many people.”

“As residential building and new home sales slow across the Upstate, housing is a buyer’s market, said Debbie Dorn, a Realtor in Anderson. One of her clients, who wanted to move from Florida to Anderson, dropped the asking price on a home from $450,000 to $375,000 after 120 days on the market.”

“‘There’s not too many people who can afford to buy a new house before their old house sells,’ said Tom Carr, a Realtor in Anderson.”

“Not even Hartwell Lake properties are bucking the trend, with home sales down 51.5 percent from last year, according to statistics Mr. Carr pulled from the Upstate MLS. ‘We’re not scared, but it’s definitely not as good a market as it has been over the past few years,’ Mr. Carr said.”

“The drop in sales could be the result of low water levels. It also could be a sign that the baby boomers who have been driving the marketplace for lake homes, second homes and resort properties have reached the tipping point as buyers, said Dave Chamblee, owner of Anderson Area Properties.”

“At some point, baby boomers’ buying will slow. Then they’ll become sellers, Mr. Chamblee said.”

The News & Observer from North Carolina. “The auctioneer was warmed up and ready with a microphone. The spectators watched eagerly. The house was open, spotless and decorated. The only things missing Thursday were the bidders.”

“Despite publicity, no qualified bidders showed up to bid on the four-bedroom home, with a tax value of $466,472.”

“The house has been on the market for more than a year. The broker then turned to a home auction company. Sarah Sonke, AuctionFirst co-founder, says the Triangle market for home sellers isn’t as robust as people think.”

“‘What’s happening is the resell homes are sitting out there, and [sellers] are really not getting desperate, but they’re getting concerned that no one is coming for a showing,’ she said. ‘The resell homes are really suffering.’”

“Thursday’s result didn’t dishearten Laura Brockington of Chapel Hill. She, too, is planning to auction her home in August. After many showings and no offers, ‘not even a bad offer,’ she’s ready for a new strategy. ‘I need to be out of that house.’”

The Dickson Herald from Tennessee. “Don Dey flips a house about once every three years, and there’s no question that his latest listing, a 5,200-square-foot home that he describes as having a French style with a mansard roof, has taken longer than Dey’s previous two homes to sell.”

“Despite searching for a buyer for more than three months and living in a section of town that’s crowded with ‘for sale’ listings, Dey has no intention of lowering his asking price of $700,000. It’s just a matter of waiting, he says, and keeping realistic expectations.”

“‘There’s nothing that is a red flag. We experienced record growth in ‘04 and ‘05, and it’s hard to keep that pace,’ he said of the Nashville-area housing market.”

“‘There are more listings and it’s taking longer, but it’s back to reality,’ he said.”

“Realtors say much of the sizzle of the recent past appears to have seeped out of the Nashville market. The inventory of homes for sale is on the rise. The number of detached homes, condos, multifamily buildings, farms and lots on the market has increased 34 percent in the past year to more than 21,000 properties.”

“Buyers seem less eager to make an offer on a home, and when they do, they are often asking for more concessions, or adding a clause that voids the sales contract if they cannot sell their previous home, real estate professionals say.”

“Evidence of the slower market can be found in the area around Dey’s house. More than two-dozen homes are on the market in the Green Hills neighborhoods nearest the border with Belle Meade, including nine in Dey’s Sugartree subdivision, not counting his. Two years ago, many of these homes probably would have already sold.”

“‘It’s like the buyers huddled all over town and said, ‘We’re going to be tough,’ said Bill Bainbridge, an agent in Green Hills.”

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