The Housing Bubble

We continue to review the media; in the north-west.

The good:

The Oregonian, May 2005: “Portland’s median home price has grown from $170,100 in 2000 to $210,000 at the end of 2004. By the end of March, it had surged again, to $223,000, according to the Regional Multiple Listing Service. That’s a 31 percent gain since 2000.”

“The average monthly Portland rent over the same period dropped 14 percent, to $704 from $801. Vacancies at some apartments are at 20-year highs.”

“Brad Vincent, president-elect of the Portland Metropolitan Association of Realtors says, ‘You’ll lose the chance for potential growth and tax benefits. Overall, the benefits for owning are clearly better.’” Realtor Brian Pienovi agrees, ‘Our appreciation is real, 10 percent. If you figure that on a $250,000 home, that’s $25,000 in one year.’”

“Jim Straub, a Eugene owner of rental houses and duplexes said, ‘I see an advantage to selling my home now because the market is red hot, people are paying ridiculous prices for property. “If your goal is to buy low and sell high, you should get out while the getting’s good.’”

May 2005: “My wife and I have a particular interest. Since last winter, we’ve had plans to sell our house, and we’ve been gussying it up for a summer sale.”

“We love that our house has appreciated so much in value since we bought it in 1999. We’re less excited that everyone else’s homes have gone up so quickly with it. The rise is dizzying, as is the calculation of whether we’ll be able to sell our home and afford another. Could we be the ones left standing with no home when the market crashes? Or worse, what happens if we take on an inflated mortgage, only to see a market correction in the next year?”

“If this is a mortgage bubble, when will it burst and by how much? What will happen to the value of my house?”

“I would hate to see us make our move just when the bubble bursts and lose all we’ve worked so hard for. But whether we are the ones to get caught, or someone just like us a year from now, the signs look unmistakable: The housing market will stall out. When it does, and the game of musical homes stops, someone will be left with an overpriced home. I sure hope it’s not us.”

The Columbia Tribune, April 2005: “Gloria Curtis said Duncan recently hired her to do telemarketing. She received no training on processing loans before she was assigned a calling list (and) was promised $2 for every Social Security number she obtained from a client over the phone. But Curtis said she lost her job because she hadn’t gotten any numbers in her first two days.”

The Tri-City Herald, May 2005: “As occupancy rates drop in the Tri-Cities, renters are getting move-in incentives and a choice of amenities. Vacancy rates, which averaged about 3 percent in 2002, increased to 9 percent in Richland, 11 percent in Kennewick and 8 percent in Pasco.”

“Pasco’s vacancy rates will probably catch up soon. Permits have been issued for three new apartment buildings at Chapel Hill that will add 668 units, bringing the city’s total number 1,959. ‘There was a lack of complexes in Pasco, but now that’s taken care of,’ Sylvia Erickson said.”

“The average price for a two-bedroom in Richland is $667, compared with $708, the average price in spring 2003. The average rent for a one-bedroom Kennewick apartment is about $486. In Richland, it’s $563, and in Pasco it’s $524.”

“Those selling include San Francisco-based developer Robert Young, who has placed his eight properties on the market. ‘I’m bullish on the Tri-Cities. I’ve always been bullish on the Tri-Cities.’ So why is he selling his eight apartment buildings? Young said he wants to devote his energy to a commercial development he is building.”

“It could be one of the best times to sell an apartment building in the Tri-Cities, said David Eagle. (He) said many investors are turning away from primary markets like Seattle, Portland and Los Angeles, where real estate prices are extremely high and the opportunity for growth limited. He said they’re looking more seriously at ’secondary’ markets.”

The Seattle Times, May 2005: “Paul Galasso quit his Costco management job to join his wife, Evelyn, as a full-time real-estate investor. He and his wife have spent more than $20,000 on investor ‘boot camps’ and seminars to learn how to make deals. Galasso said he knows people just like him in Georgia, Texas, California and beyond now investing in residential property.”

“Galasso and his wife fired their financial planner and shifted 75 percent of their retirement resources from regular equities and mutual funds held in a traditional IRA into a ’self-directed’ IRA that they can use to fund real-estate deals. ‘In real estate I can do a lot to increase the price and value of my holdings, which isn’t true of having stock in some large company,’ Galasso said. ‘By the end of this year, we’ll be doing two to three homes a month.’”

“And he doesn’t regret leaving his management job. “This is so much better than being in a cubicle.’”

“Michelle Dickerhoof, quit her corporate-affairs job at Starbucks last fall to collaborate full time with her contractor husband to find fixers to invest in. She’s just secured a home-equity line of credit on her primary home to pay for the new properties. She expects the two properties she’s eyeing could be resold for around $400,000 after they’re fixed up.”

“Jeff Wolfson, a residential land-development specialist at Skyline Properties in Kent, is researching investment opportunities for himself and clients. Wolfson, who has been in the industry for nearly 20 years, says many investors are overextending themselves on the assumption that the market will remain favorable. He believes low interest rates contribute to this, he said. ‘I’ve been in the industry long enough to see how it operates in cycles. I believe the market right now is in a bubble, people are putting 10 percent or 5 percent or zero down, or they’re taking adjustable rate mortgages, but then one day their renters can’t afford the rent, and the owners aren’t prepared for that.’”

The Seattle PI. May 2005: “Like thousands before them, Tom, 44, and his wife, Clare Cronkleton, 43, had grasped at home ownership as their ticket to the solid middle ranks of the middle class. The couple made the leap even on their relatively modest incomes, each in the $40,000 range, and with no money down. It took a second piggyback mortgage at a steep 15 percent interest rate to pull off the sale. (Then) their 8-year-old son, came down with a mysterious, flulike illness. In the summer of 2004, Tom lost his job.”

“They had already refinanced their mortgage at a lower interest rate to cut their payments and drawn out what little equity they had accrued. Tom says, ‘As long as things were going good, it was OK.’”

“They listed their house last winter (and) sold in a hurry for $300,000. By the time all the closing costs and commissions were figured, however, they still owed the bank money. The bank finally relented and agreed to a ’short sale’.”

“People have been buying on the very edge of their ability to afford a home,” says Glenn Crellin, at Washington State University. ‘People are (getting in at) a below-average rate, and they run the risk. We may see some households no longer able to afford the houses they’re in.’”

The bad:

New York Times, May 2005: “Paul and Ann Hill, a pair of retired Atlantans, stopped in Ashland, Ore., in 2001. Their only plans involved dinner and a play at the long-running Oregon Shakespeare Festival. “We came into this town one day and bought a house the next.”

“In the first three months of 2005, 91 homes were sold in Ashland. The median home price of those sales, $403,700, represented an increase of 32 percent over the first quarter of 2004.”

“‘People come there to see a play, and they fall in love with the town,’ said Roy Wright, an appraiser. ‘And they walk in one of those real-estate offices downtown and buy a house.’”

“Like many Ashland newcomers, Davis hails from the San Francisco Bay Area. ‘It’s not if you came from California, but when you came from California,’ he said.”

“The influx of outsiders seeking second homes has had an explosive effect on housing prices. An example is Taos, where the value of residential real estate sold in 2004 was nearly twice the value of that sold three years earlier.”

The Seattle Times, May 2005: “Fuel for speculation of a housing bubble, but not proof of one, increased yesterday on a report that strong buyer demand has pushed Central Puget Sound prices up 10 percent or more over last spring’s already high numbers.”

“But those numbers were modest compared with other metropolitan areas. San Diego home prices shot up 37 percent last year. Las Vegas’ soared 52 percent, and Miami reported a 26 percent. Those markets could see price corrections, some experts surmise. ”

“‘Nine or 10 percent appreciation is certainly more sustainable than 25 percent, so in your market, I don’t think there’s a bubble,’ said Steve Smiley, a principal at Hanley Wood Market Intelligence, a housing-market research firm headquartered in California. ‘Seattle has been a decent market, but not a great market, and you still have room for prices to move up.”

“Coldwell Banker Bain broker Dick Fulton concurs. The 1990s ‘mini bubble’ was the last time the Seattle area saw anything close to a real downturn, Fulton said. That was precipitated by a 41 percent increase in housing values from the fourth quarter of 1989 through the first quarter of 1990. That’s an 82 percent annual increase.”

“‘That kind of extreme increase in prices necessitated a correction,’ Fulton said.”

What are your housing bubble predictions for 2010? Some from one year ago. “I think it will be so bad in 2009 that no statistics are even made. Like the lost years. The dark ages of the housing market in California lasts until 2012. I’m off to burn a witch.”

One sees this. “It was a rolling bust, so it will be a rolling recovery.”

“I will maintain to the end, however, that the longest suffering will be endured by ‘flyover’ country. As some of you point out, the bubble masked the Rust Belt’s death throes. Stories of fleeing manufacturing were already there eight years ago - for those that cared to put their 401k statements down long enough to look. I remember small mfg. closures being well documented in the Midwest press circa 2000.”

“Given a choice, I’d still cast my lot with the Sun Belt states - over the longer term.”

One looks at migration. “I think the immigrants will have a positive affect on the real estate markets of such cities as Frisco and NY. I’m from NY, and I can tell you that these immigrants from Korea and South America (Savers) are just keeping otherwise slums from being turned into such. It’s all a tug of war, as it were, but in the last downturn, circa 1991, Jamaica, Queens all but folded up. Not now. There are all these immigrant businesses to fill the gap with restaurants, cheap stores, like 99 cent stores, etc. Not upscale, but it does seem to have its own economy.”

Another sees a political angle. “‘When and why’. I will still go with 2012. Reserving the right to amend that estimate as time goes forward!”

“Why not sooner: Prices are still very high by the measure of rents and incomes, and the downward movement of prices, though now accelerated in many areas, would still take a few years to bring prices in line with rents (if rents don’t fall a whole lot). We have often noted that the resets in the Zellman chart and other people’s updates of that chart have a second peak in 2011. I’m not sure if that matters while prices are sinking — foreclosures will feed on themselves without requiring the additional impetus of ARM resets. However, if prices had any other reason to stabilize, the ARM resets would tend to prevent it.”

“Why not later: Let’s just say, Obama, C. Dodd, B. Frank, and Columbia dean Glenn Hubbard, not to mention Sheila Bair (if she’s rehired) will all be trying very hard to arrest the decline. The worst of it is, they may succeed in making the decline go slower and last much longer. But O will be up for re-election in 2012, so it would be good for him if there had (then) been several months in a row of flat-to-upward house-price statistics.”

From TC Palm. “A recent stabilization of home prices is a temporary plateau before another significant drop in 2010, an economist for a leading independent provider of economic and financial research said. They forecast a 24 percent drop in the median sales price of single-family homes in the Port St. Lucie Metropolitan Statistical Area from the third quarter of this year to the third quarter of 2010.”

“Treasure Coast Realtors said they are skeptical of the forecast. Karl Zimermann, president of the Indian River County Realtors Association, said, ‘I look at these predictions with a degree of skepticism because with the environment we’re in, there’s no history to make predictions on.’”

“Skip Radin, who has had a Key West-style three-bedroom home in Windmill Village on Hutchinson Island in Jensen Beach on the market for three years, said he isn’t ready to panic. Radin bought the home for $200,000 in 2000 because he and his wife needed a house close to where her mother lived. When his mother-in-law moved to a nursing home, he listed the house for $679,000 in mid-2006.”

“Radin, who dabbled as a Realtor along with a career in education, has lowered the listed price of the home 10 times and now is asking $329,000. He is on his fourth Realtor, Cheryl Gaydos. Gaydos said she thinks the housing market in much more stable than the Economy.com forecast indicates, especially for homes on or near the waterfront. Radin said he now regrets passing on some earlier offers he considered insufficient at the time.”

“Gaydos said, ‘As a Realtor, you know they want to hold out, but sometimes the first offer is the best offer.’”

The Christian Science Monitor. “The national economy may be in recovery, but most states haven’t yet hit bottom – and many are already facing massive budget gaps halfway through their fiscal year, despite basing those budgets on dismal forecasts.”

“‘Unless you’re North Dakota, you’re probably a state that has had some degree of difficulty or crisis involving finances,’ says Arturo Pérez, a fiscal analyst with the National Conference of State Legislatures (NCSL), which released its survey of state budget situations earlier this month. ‘It’s the worst situation states have faced in decades, perhaps going as far back as the Great Depression in some states.’”

“The result: furloughs, deep cuts to state programs and services, fee and tax hikes. ‘The next couple of calendar years will be some of the worst in terms of the tough choices that elected officials will have to make,’ says Scott Pattison, executive director of the National Association of State Budget Officers, adding that the stimulus funds that benefited states will soon be drying up, make the situation even more difficult. ‘There’s not a lot left to do that aren’t really really tough political choices.’”

“Arizona. Like California, Florida, and Nevada, Arizona is one of the states that was hit worst and earliest by the housing crisis. ‘The fiscal situation is dire,’ state officials states in NCSL’s survey, citing major shortfalls in all budget categories. Lawmakers are forecasting a 30 percent budget gap in the next fiscal year.”

“Nevada. One of the hardest hit by the housing crisis, the state faces a projected shortfall of 33 percent for its next budget year.”

The Las Vegas Business Press. “Locally, the avalanche of foreclosures predicted for Las Vegas has failed to materialize. November’s 1,477 foreclosures represent a 27 percent decrease from a year ago, the fifth month of the year with declining year-over-year numbers. ‘In our view, Las Vegas may be entering a new real estate era,’ consultant Steve Bottfeld of Marketing Solutions said. ‘Whether you call it the end of the beginning or the beginning of the end, there is no question that the residential market is in a transition from what it was to what it will become.’”

“Housing analyst Dennis Smith of Home Builders Research counted 604 new-home sales and 3,696 existing-home sales in November, a 6.1 percent decrease and 46.8 percent increase, respectively, from the same month a year ago. Median new-home prices dropped to $195,000, while existing-home prices fell to $124,000.”

“‘Bottom line is this indicates a very flat recovery,’ Smith said. ‘There (have) been good months and bad months. Good isn’t anything that goes up $1,000. That’s flat. The tax credit … it’s parallel to what’s going on with CityCenter. They don’t know if it’s going to be bad or good for the economy. We know what it did for home sales and we have to assume it’ll work again, but I don’t want to stand here and wave a flag that says next year will be better than this year. A good year will be if we beat the numbers for 2009.’”

The Arizona Republic. “Valley home prices have recovered at roughly the same pace since April, but Arizona State University professor Karl Guntermann sees that nice, straight trend line as more like a tightrope than a solid foundation. ‘While the increases reflect a clear trend, this is still an unstable housing market substantially influenced by foreclosures on the supply side and investors on the demand side,’ said Guntermann.”

“For the past eight months, the ASU index has been in negative territory…In September it reached -23, which means the Valley’s median home price was 23 percent lower than it had been a year earlier. Guntermann said his preliminary data show an index of -20 in October and -17 in November. Meanwhile, the actual median price of Valley homes has been going up. It was about $135,000 in November, preliminary data show - still down 17 percent from a year earlier, but up about 15 percent from this year’s low of $117,500 in April.”

“If the current upward trend continues, the index will cross back into positive territory next summer. But that’s an awfully big ‘if,’ Guntermann said. The high volume of homes passing from bank to investor is but one of several troubling elements lurking in the economic undercurrent, he said.”

“In all likelihood, Guntermann said, the Repeat Sales Index will stay close to zero for a few years once it gets there, with home values remaining relatively flat. ‘Even if we get to zero change in the next year, it doesn’t necessarily follow that the index is going to continue going up,’ Guntermann said. ‘It’s going to take longer, clearly, to get out of this mess than it took us to get into it.’”

The Coloradoan. “Expansion and extension of the homebuyers’ tax credit through April 2010 should boost home sales next year, helping the industry rebound from one of the worst markets in memory. Or maybe not. ‘It’s not going to take a lot of activity to start showing increases … but I don’t see consumers ready to jump back in with both feet,’ said Dave Pettigrew of Prudential Rocky Mountain Realtors and a Coloradoan real estate columnist.”

“Eric Thompson, president of The Group Inc., said the company has seen ‘a good amount of interest’ in the $6,500 tax credit. Even though the $6,500 represents just a fraction of the price of a home, that, combined with good prices and good interest rates, is a motivator, he said. ‘It’s free money.’”

“Builder and architect Dana McBride built what he calls an industrial barn loft in Rigden Farm last year priced just outside first-time homebuyers’ likely price range. At $369,000, the home languished through six potential buyers who had to sell their existing homes before they could purchase his. All deals fell through and the home is now rented.”

“McBride does not expect the $6,500 tax credit to have as much impact as the first-time homebuyers’ credit. ‘Where people need help right now is in the banks wanting larger down payments. The $6,500 is not as a big a factor as it would be for first time homebuyers.’”

“Northern Colorado once benefited from a steady flow of California residents and new jobs created by corporations moving to the region. In this economy, companies aren’t moving and Californians can’t afford to sell their homes in a depressed market. ‘If there are no buyers and no lenders, it’s tough to get (the housing market) going,’ Pettigrew said. He also worries about a ’shadow market’ of owners waiting until the market improves to put their home up for sale. ‘If we do get an influx of buying interest, there is an awful big inventory of homes that will hit the market because sellers are seeing more activity.’”

The Daily Bulletin. “After dropping to $137,000 earlier this year, the median home price in San Bernardino County rose to $160,000 between August and November, according to MDA DataQuick. Still, some experts question whether a true recovery is forming. Richard Gollis, co-partner of The Concord Group in Newport Beach, says the Inland Empire price upswing is because thousands of lower priced bank-owned homes have been cleared away, and now the higher-end foreclosure sales are swinging the median value higher.”

“‘It doesn’t mean the same house went from $135,000 to $160,000,’ Gollis said about foreclosures and traditional sales. ‘It means the mix of houses have changed. You’re seeing fewer of that cheap, cheap, cheap stuff (selling) on the market.”‘

“He estimates lenders are holding almost 40,000 Inland Empire foreclosed properties on their balance sheets.”

The Record Searchlight. “‘Housing production will increase. OK, this is any easy one. In 2009, housing production was at the lowest level ever recorded. It’s not going to go down further. The turnaround will not be rapid, but it’s coming. We all read the recent news stories about California’s slow population growth of late. Keep in mind, though, that even when population increases slowly, the state still adds a lot of people. From July 2008 to July 2009, the population jumped 353,000. That increase equates to a need for roughly 140,000 housing units - or about 40,000 fewer than builders produced in 2008 and 2009 combined. In other words, market demand is going to necessitate more housing production,’ Paul Shigley of the California Planning and Development Report.”

The Fontana Herald News. “The start of the New Year can stir a wide range of emotions, and recently the Herald News held a contest and asked local residents to give their opinions about whether 2010 will create joy or sadness. Jennifer Castro said she thought that 2010 will probably be another bad year in general for Fontanans.”

“‘I don’t see many new jobs because of the economy being so bad,’ she said. ‘The rest of the country brags about unemployment numbers falling, but that’s not the case here in California. I also still see the housing market not doing so well in 2010. So many people in San Bernardino County are still losing their homes.’”

“In fact, she said, her husband is currently unemployed and the family members run the risk of possibly losing their home. ‘He has been looking for work, but it is very hard to find work in this kind of economic downfall. It is nearly impossible to live off of unemployment benefits,’ she said. ‘Hopefully my prediction is wrong, but from the looks of things it will probably be just about the same as this year (2009).’”

The Union Tribune. “Peter Dennehy, senior vice president of Sullivan Group Real Estate Advisors in San Diego, said fewer foreclosures would improve the housing market, at least in the short term. ‘We’d have a healthier housing market if we had a better economy and better job prospects and if people are actually able to pay their mortgages,’ he said.”

“While foreclosures typically carry low prices, Dennehy said first-time buyers often cannot compete against investors or get loans for as-is properties that banks will not pay to repair. ‘What we really want to see is normal people buying and selling homes at all levels of the market,’ he said.”

The North County Times. “It has been an interesting year. And, most interesting to me has been the continued separation between what many people believe and what is reality…At a Christmas party this year, I was chatting with a neighbor who had moved in a couple of years ago and was going through a refinancing. He was surprised that the appraisal was actually higher than the price he paid for the home. And, I’ve heard that from others.”

“I have avoided writing about real estate for some time because, like many issues, there continues to be a difference of opinion about where the market is now and where it is heading. For some reason, the people who disagree with me have attacked me in the most vicious manner.”

“I thought I’d use the opportunity of this, my last column for the North County Times, to share my thoughts on real estate… So, will home prices continue to rally in 2010? Hell if I know. I think they will and I know they will over time. But those who think otherwise are welcomed to their opinion and I respect that.”

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