October 6, 2007

Making Deals On Every Transaction

The Denver Post reports from Colorado. “With more people afraid their homes won’t sell in today’s slumping real-estate market, the number of existing homes listed for sale in the Denver metro area in September dropped from the same period a year ago. ‘Sellers, if they’re not in an upside- down position and they have any equity, are going to rent it out and hold on to it for another year or two until this whole mess washes out,’ said Ed Jalowsky of Hottest Homes Realty. ‘If they don’t have the cleanest, freshest apple on the pile, the property is going to go stale on the market.’”

“Sales of existing homes also declined, in part because buyers can get better deals on new homes. ‘Part of the reason is the new-home builders are at a point where they have inventory on the ground, ready to go,’ said Gary Bauer, an independent real-estate analyst who compiles a monthly report based on MetroList data. ‘The only way they’re able to sell that inventory is they’re making deals on every transaction.’”

The Rocky Mountain News from Colorado. “The recent collapse of the subprime mortgage market and still-climbing foreclosures drove down sales and home prices in Denver last month.”

“The recent shakeout in the subprime market is a ‘blessing,’ said Deviree Vallejo of Kentwood City Properties. ‘No. 1, the unsavory lenders are getting out of the business,’ said Vallejo, who has seen bidding wars on some homes.”

“‘And No. 2, everyone was getting their real estate license, but now those people are getting weeded out,’ Vallejo added. ‘So only the best professionals will make it.’”

The Arizona Republic. “Not long ago, builders were raising home prices here thousands of dollars week after week. Families camped out for lotteries to win the right to buy. Buyers gambled with loans whose risks were obscured by euphoria.”

“While the pressures at work in Queen Creek were extreme, the choices people made - and the consequences, are not so different from those faced by thousands of other homeowners and their neighbors.”

“‘In 2004, Dave Gustafson and his family headed to Arizona to visit relatives. Back in California, they had less than 1,100 square feet. But salesmen here offered 2 1/2 times the space for half the price. ‘The sales person was saying that they (homes) were going up $1,000 a week,’ Dave Gustafson recalls. ‘So … we signed right away.’”

“Kris Rowberry, ecstatic when the value of his home in nearby Gilbert took off, bought a second one in the Villages as an investment. ‘I was thinking, man, if I could have 10 properties, I could just kind of retire … and kick back and live off the income,’ he says.”

“There was a problem, though, obvious only in hindsight. A market that had skyrocketed was about to plunge. Problems began to snowball. High gas prices prompted people to rethink living on the outskirts. Investors rushed to sell. Builders continue adding homes at reduced prices. Investors are trying to sell.”

“Lenders are seeking buyers for foreclosures. Homeowners whose financial troubles might be solved by selling can’t compete.”

“Things looked…uncertain to Joy and Paul Kessler, until they did the math. They could fight for their house. But why? It’s worth at least $40,000 less than they paid.”

“‘It’s sad to say but honestly, we don’t feel like there’s anything worth saving in this house,’ Joy says. So the couple decided to let the place go. Everyone said it was the right thing to do.”

“Metro Phoenix now leads the country for condo ‘reversions.’ Developers jumped on the condo-conversion craze in the Valley a few years ago, snatching up apartment complexes to turn them into for-sale condos.”

“But the demand for those condos slowed with the rest of the housing market. Now, more than 2,946 condos are being turned back into apartments in the Phoenix area, according to Real Capital Analytics.”

The East Valley Tribune from Arizona. “Corporate homebuilders are watching their earnings drop and tightening their belts, Valley real estate analyst RL Brown said. ‘There are scores of subdivisions that have little if any activity in them,’ said Brown.”

“John Fioramonti, senior managing director at Meyers Builder Advisors in Scottsdale, said he’s seen cancellation rates as high as 40 percent in some cases.”

“At Shea Homes, employees help potential buyers set realistic asking prices on their old homes, ‘which is a hard pill to swallow’ for some people, said Ken Peterson, the builder’s VP of sales and marketing. That’s because some homeowners owe more on their properties than they’re worth.”

Business Week reports on Nevada. “Las Vegas was once the hottest of the red-hot real estate markets. But when sales really started choking up last year, developer KB Home did something drastic. Determined not to be caught with a big backlog of unsold homes through one of the industry’s notorious down cycles, the builder started slashing prices. A lot.”

“In the 1,400-home Huntington community, a subdivision of two-story stucco houses west of the famed Strip, homes that started at $320,000 a year ago are now listed for $270,000–just a starting point for potential deals.”

“For homeowners who jumped in at the height of the boom, the discounts aren’t so good. Mike Alley has gotten whacked hard by the area’s declining housing market. In the spring of 2005, Alley, an independent real estate agent in Racine, Wis., moved to Las Vegas.”

“He quickly found a sales job with Pulte, where he says agents were pulling in $500,000 a year for basically taking orders. A year later, he decided to jump into the market himself and buy a home. He spent a month searching, settling on KB’s Huntington subdivision.”

“The $86,000 worth of upgrades thrown in by KB Homes at a discount clinched it. Alley thought he was getting a deal: In August, 2006, he paid $360,000 for a three-bedroom home in Quayside Court, which was appraised for $415,000.”

“Yet even Alley, who made his living in this industry, says he was blindsided by the markdowns. Today he reckons his home is worth around $300,000. ‘I didn’t quite keep my finger on the pulse of what [KB is] doing in this community,’ says Alley, who’s largely gotten out of the real estate business. ‘I’m looking at the sales data, and they were selling my model for $50,000 less even months after I bought it.’”

The Review Journal from Nevada. “Home sales in the Las Vegas Valley reached the lowest monthly total in five years, the Greater Las Vegas Association of Realtors reported Friday. The 990 sales in September were down 25 percent from the previous month and 43.1 percent from the same month a year ago.”

“Realtor Eric Young calculated a 22.1-month supply of homes on the market. About 45 percent of the homes are vacant. ‘The figure for the Vegas Valley reflects the tremendous number of speculators that are headed for the exits,’ Young said.”

“‘Buyers are there. They’re just going to have to feel confidence to get back in the market and realize there’s no mystical bottom,’ said Devin Reiss, president of the Greater Las Vegas Association of Realtors.”

“‘No one expected such a downturn in the market and a lot of people are stuck holding the bag,’ Reiss said. ‘You can’t blame Realtors. Everyone has a right to make money.’”

The Las Vegas Sun from Nevada. “After years of skyrocketing home values and speculation, Nevada sits near the top of most foreclosure rankings. About 40 homes go into foreclosure every day in southern Nevada, the governor’s office said.”

“Gov. Jim Gibbons said he saw the problem as largely a matter of borrowers taking on loans they should not have sought. He said he did not believe the state should intervene with funding assistance or restrictions on loan products or limits on the way they are marketed.”

“‘Not everybody is going to be able to be saved in this,’ he told reporters.”

In Business Las Vegas from Nevada. “Famed bond manager Bill Gross has called on U.S. government to bail out the millions of American homeowners who face losing their homes to foreclosures, but you haven’t heard such a call in Nevada where the state has the highest foreclosure rate in the nation.”

“It will be hard convincing any taxpayers at the national or state level to kick in massive amounts of tax dollars to bail out those whose poor financial decisions may cost them their home. Many will ask: What’s next, bailing out those who have gotten themselves into credit card debt?”

“The division president of one leading Las Vegas builder said the government should opt against any massive bail out. He said buyers should take responsibility for speculating or buying more home than they could afford. He referred to it as giving an alcoholic another drink.”

“‘I am a free-market guy,’ the division president said. ‘I don’t believe in a bailout. It just rewards irresponsible behavior so people take more risks.’”

“Las Vegas housing analyst Steve Bottfeld warns against any massive federal bailout because it would be abused. He said the government should focus on stopping similar problems in the future by cracking down on those who took advantage of the mortgage system.”

“‘I really think you have to criminalize those who take advantage of the mortgage system and lie. I am not referring to investors but to speculators,’ he said. ‘When you get 40 foreclosures with the same name on it, you can’t get that number of mortgages without lying. The reason for it is very simple. That person just hasn’t hurt the lender. That person has hurt the entire industry.’”

“The prices of new and existing homes have been steadily dropping in Las Vegas since mid-2006 and professional traders and national economists who are monitoring Las Vegas like a weather vane are betting prices will continue to slump.”

“‘We have not hit the bottom yet in Las Vegas,’ said Tim Sullivan, president of the Sullivan Group Real Estate Advisors. ‘The overriding theme is we have too much supply, a weakening economy, and we have got to figure out a way to survive this downturn.’”

“At the end of August, there were a record 27,321 resale homes on the MLS, according to SaleTraq.”

“Astoria Homes, a private homebuilder based in Las Vegas, announced it will hold its first-ever sale. The company’s new-home sales are down 42 percent from 2006.” “Astoria’s sale runs Oct. 12 through Oct. 14, showcasing homes from Aliante in North Las Vegas to Southern Hills in Henderson, its development in Centennial Hills and another near Summerlin.”

“Prices have been discounted by as much as $200,000, and its least expensive homes during the sale will be marketed in the $170,000s after a $50,000 discount.”

“‘We want to be busy,’ said Astoria Homes President Tom McCormick. ‘It is a reflection of the market. We have never had a sale in our 12 years in business, and we have to be more aggressive about adjusting our pricing.’”

“‘It’s going to take up to two years for the market to work itself out,’ said Ryan McPhee, owner of RPM & Associates, a Las Vegas real estate investment company. ‘We have too much inventory, and more on the way.’”

“The median price of existing homes in Las Vegas stood at $164,000 in 2003, but that quickly jumped to $230,000 in 2004 and topped out at $285,000 at the end of 2006. Speculators and low borrowing costs drove the drive up prices, the experts said.”

“Almost half of Las Vegas home sales in 2005 and 2006 were to people who intended to resell quickly for a profit, according to data compiled by Fannie Mae, the world’s largest mortgage buyer.”

“When the value of a house is less than the mortgage, owners who want to sell have to pay the lender the difference to buy out the loan, in some cases as much as $50,000, McPhee said.”

“Some of the owners who bought in the early years of the boom are stuck, even after seeing prices double in five years, McPhee said. ‘Some people have seen their home values soar, but a lot of them refinanced to pull out that equity and spent it on cars or gambling,’ he said.”




Inflation or deflation?

Readers suggested a topic on home prices and overall price movements. “Where to now………………? Inflation or deflation?”

One said, “I know alot of retired people who tell me that inflation is killing them, especially the food prices at the stores and medical costs. Also, its interesting how the global money supply served to help create the excess money supply that made the housing boom so possible.”

A reader from Europe, “The reality is that current central bank policy hugely benefits certain citizens while stealing from others (savers/renters/fixed income etc.). I don’t think that will change, the politicians have already made their choices and continue the current road until the bitter end. And their choices about who to support are not much different in the US or Europe.”

“In Netherlands over the last 15 years or so, homeowners have seen their income from equity gains far outpace the higher expenses for daily life. Even with the current 5-10% yoy home appreciation the equity gains probably outweigh the inflation losses, that is: if you are a homeowner. Central banks and politicians know this, so they keep inflating.”

“Our realtors are now warning that there is a looming ’shortage of homes because of high prices’ in the Randstad (the big Dutch cities): home prices are getting unaffordable for most of the population, but on the other side home prices have to keep rising to keep the middle class homeowners happy, they simply need the extra income…”

“There is no real ’shortage’ of homes as the Dutch population is hardly growing. The shortage is artificial, pentup demand from people who want to move up as long as the government or tax office pays the extra cost, and many renters who want to own a home because that is the easy way to riches. The price level of Dutch homes is most of all the result of all the free money the Dutch government and the banks keep pumping into the housing market.”

One looked back, “In the 90s inflation pressures created by excess money did not go to gold. Instead they went into two successive bubbles, stocks and housing.”

“Also, the effects of outsourcing/globalization were highly deflationary in the consumer goods sector. This one-time deflationary effect is now over, and we have seen since 2000 gold outperform the stock market. Inflationary pressures at work in Asian export markets will now spill over into our economies as well and we will see that inflation was only postponed, not reversed.”

“Combined with weakening USD, growing demand for goods in developing nations, and rising commodity prices this is a recipe for hyper-inflation IMO.”

A reply, “I dunno. Look to Japan as a model? People seem to like to compare that scenario with the current one. They are still trying to recover from their last bubble collapse which drew down industries of all types, reversed growth and caused severe deflation.”

“We see deflation now. A dollar buys much more house today than it did yesterday. As people’s ability to purchase thing dries up further, a buck will buy more of just about anything than it can today.”

Another said, “Housing is deflating just like Enron and Worldcom stock deflated. It was overpriced and with similar lies.”

“The industry in Japan most impacted by the deflation were financial firms. It was keeping the banks solvent that resulted in a generation of deficits. Manufacturers were not impacted with lack of buyers, Japan is an export oriented country.”

“Tis not prudent to call a credit bubble collapse in housing deflation. The misnomer is the perception of houses as assets when they should more properly be thought of as liabilities.”

Which drew this post, “I can’t say I’m completely clear about your point.. but let me suggest that a house is a real thing.. solid.. bricks and wood. Under any conditions, some entity owns all or a part of it, and that entity sees it as an asset.”

“At the same time, it may also be a liability to some other entity, and in the normal course of things it likely is. How this particular distinction helps in predicting macroeconomic conditions escapes me.”

“If nobody can afford to buy that house, regardless of our POV of it as an asset or liability, it’s price will deflate.. no?”

Another added, “I would think that in most cases, aside from architecturally significant properties, most if not all of the (long-term sustainable) value increase is due to the land, not the decaying structure standing on it.”

“Outside of bubbles or the handful of cities where it’s nearly impossible to build a new building (SF and NY), the only way you can say that the building itself appreciates in value is to neglect the maintenance and other carrying costs.”

One made this stand, “I vote for deflation. There’s too much money destined to be destroyed by the coming economic contraction. Cash will be king, even USDs.”

One agreed, “That’s about it. The country will still have the hard assets and natural resources and goods and services available for sale.. (Most) people will just lack the money to purchase them.” “High demand is nullified by the lack of ability to pay the price. Add high inventory…in what direction do price tags go?”

One posted this, “People bemoan the negative savings rate in this country, as they should, and as a country the pain will be felt. But an individual in this country who bucked the trend and saved instead of borrowed will be in a great bargaining position in the days to come.”

“Because saved dollars are few and thus scarce their value will increase. Much of the borrowed dollars will simply disappear.”




Dramatic Price Reductions Have Had Limited Success

The Memphis Business Journal reports from Tennessee. “Shelby County’s second-largest homebuilder, Levitt & Sons of Tennessee LLC, is leaving the market after parent company Levitt Corp. made a decision to exit the state. ‘Sales are not as prevalent as last year,’ says Anthony Gunter, president of Levitt & Sons of Tennessee.”

“Levitt’s exit from Tennessee, though decided on prior to the current layoffs, is part of a company-wide downsizing. In a letter to employees, Levitt Corp. leaders recently explained that the layoff decision could not be avoided since home sales have slowed significantly.”

“Efforts to increase home sales ‘through incentives, dramatic price reductions and aggressive marketing have had limited success,’ according to a recent Levitt Corp. filing with the Securities and Exchange Commission. ‘We cannot assure you that no further downsizing of our homebuilding activities will be required.’”

“‘If they dump everything they have, they will hurt the market,’ says Tim Wilson, president of the residential division at Chamberlain & McCreery. ‘It won’t hurt if they sell off what they have. It’s a responsible way to leave.’”

The Savannah Morning News from Georgia. “Eighteen months ago, upscale Whitemarsh Island apartment complexes Walden Park and the Merritt went condo, instantly adding more than 500 new homes to Savannah’s islands area.”

“Last month, online real estate auction marketing company Freedom Realty Exchange put 40 of the 70 remaining Mercer Point units up for bids in an online auction. Bids on 20 of those are set to close Thursday.”

“Minimum bids start at $86,000 for most units, although several models have $1 minimum bids and are guaranteed to be sold, said Kelly Lovegrove, communications director for LFC Group.”

“The minimum bids represent discounts of as much as $40,000 over the original prices, Lovegrove said.”

“Down the road at Merritt on Whitemarsh Island, Cora Bett Thomas Realty is offering hefty price reductions on the development’s last 30 units. ‘Everything is under $200,000 now and we have a number of units under $150,000,’ said sales agent Melanie Wright, who also sold the property for the developer when it first went condo.”

“‘That’s a pretty substantial price drop for units that were selling in the mid-$200s originally, but it’s also typical when a developer is closing out a property,’ Wright said.”

“Some original buyers have expressed concerns about the price cuts, Wright said. ‘But once these last units are sold and there is no more availability, the values will come right back up.’”

From CBS 4 in Florida. “With the spike in South Florida foreclosures, construction workers are feeling the heat, and we’re not talking about the South Florida sun.”

“Residential construction has slowed to a crawl, resulting in the loss of about 1000 construction jobs. Some local tradesmen told CBS4’s Al Sunshine they’re starting to worry more and more about a possible bigger slow-down over the next few months.”

“‘Yeah we still have jobs but it’s tight; it’s kinda tight,’ said welder Charles Eloisil. ‘I’m worried about it a little bit. Well I’m not making enough money. I’m making minimum wage now.’”

“Sam Bolden isn’t taking any chances. The Florida City native already has his own plan if the local construction industry doesn’t need elevator contractors any more. ‘If it does,I’ll travel go to Vegas [and] work over there for a while,’ said Bolden.”

The Miami Herald. “In the first roundup of suspects under a new campaign to crack down on home loan fraud in Miami-Dade County, 11 people — brokers, borrowers, sellers and title agents — were arrested in three separate mortgage fraud schemes, police announced Friday.”

“‘In the coming months, you will see more fraudulent mortgage brokers, title agents, attorney’s appraisers, and others bought to justice,’ Miami-Dade Mayor Carlos Alvarez said at a press conference announcing the arrests.”

“The roundup comes a week after federal prosecutors charged 18 people with taking out fraudulent home loans worth more than $50 million to buy luxury condos on South Beach and homes in Broward County.”

“In a third case, police said they were tipped off by a seller, who said he was approached by a buyer with an offer of approximately $100,000 more than the asking price for his condo. The buyer allegedly wanted the money to be returned to him as cash back at closing, purportedly to make renovations to the property.”

The Tampa Tribune. “At the peak of the housing boom two years ago, apartment renters like Richard Daniel were at the mercy of landlords in the Tampa Bay area. Rents were skyrocketing, up to 13 percent a year in some areas, such as Pinellas County.”

“These days, though, Daniel finds himself in the driver’s seat.”

“As he searches the Bay area for a new apartment, landlords have been showering him with promotional offers, such as a free month’s rent here, or free use of a washer-dryer set there.”

“‘I’ve noticed some landlords, as I’m walking out the door, will say, ‘Let us know, whatever it takes to get you in here, we’ll work something out,’ said Daniel.”

“During the housing boom, Bay area developers snapped up apartment complexes, gussied them up with new landscaping and appliances, and turned them into condos. Between 2001 and today, about 31,000 apartment units were converted to condos in Hillsborough, Pinellas, Pasco and Polk counties, the Cushman & Wakefield estimates.”

“Michael Slater, who runs Triad Research & Consulting, said landlords have entered a concessionary mode where they’re offering promotions to get people to rent empty units.”

“Apartment broker John Stone said landlords spent millions upgrading their apartments to ready them for sale as condos. Many landlords must charge higher rents to pay off the cost of those renovations, he said.”

“For example, an apartment that might have rented for $700 a month before its conversion into a condo might come back onto the apartment market with a rental rate of $850 a month, Stone said. That phenomenon is boosting the overall average rent in the Bay area, Stone said.”

“William Sultenfuss, who owns two apartment complexes in Pinellas County and one in Hillsborough, never converted his apartments into condos. However, he says he’s competing for tenants against many landlords who did just that.”

“Sultenfuss said that he and other landlords can’t continue to hold out much longer. Already, he is considering dropping rates at his complexes, he said. He likens the situation to the single-family-housing market, where homeowners have been reluctant to drop their prices, but will eventually be forced to do so to find buyers.”




Bits Bucket And Craigslist Finds For October 6, 2007

Please post off-topic ideas, links and Craigslist finds here.