The Housing Bubble

It’s Friday desk clearing time for this blogger. “Michael Smith moved 2,500 miles across Australia in July to earn A$120,000 ($80,000) as a blaster. Now the 30-year-old explosives expert is a motorcycle courier making half his former wage. Smith’s woes mirror those of Western Australia. The slowdown is taking its toll on a Perth housing boom that drove up prices by 146 percent between 2002 and December 2007. The cost of housing dropped 11 percent last year. Smith is contemplating selling two houses he bought with borrowed money unless he can find another high-paying mining job.”

“‘When I came over, there was plenty of work and everyone was making money,’ he said. ‘I’ve applied for everything, but a lot of the mining work is frozen now.’”

“Economist Russ Thibeault of Applied Economic Research in Laconia told members of the House Finance and Ways and Means committees that the backlog of unsold houses in New Hampshire is 16 months and growing, he said, up from 11 months a year ago. This comes despite a 16 percent drop in median prices during 2008.”

“New housing construction is at a 40-year low, he added, and foreclosures have soared from 401 statewide in 2004 to 1,056 in 2006 to 2,073 in 2007 and to an estimated 3,500 in 2008. Robert Tannenwald of the Federal Reserve Bank in Boston told lawmakers that housing prices have dropped 22 percent across New England since their peak in 2006, and nearly 1.1 percent of mortgages are going sour. ‘Not to say we’re in a depression, but we haven’t seen financial disruptions on this scale in many decades,’ he said. ‘The problem is this recession is just getting started.’”

“Massachusetts’ economy unraveled quickly last month as the state shed jobs at a faster pace than the nation and the unemployment rate soared to its highest level in more than 15 years. Over the past two months, the state has shed nearly 40,000 jobs, the worst two months of losses since the recession of the early 1990s. ‘It’s like we’re on a bungee cord,’ said Alan Clayton-Matthews, a professor of public policy at the University of Massachusetts at Boston. ‘We’re free falling, and it’s not clear where the bottom is.’”

“Tim Fraser, president of a staffing firm that specializes in the construction industry, said his company is now dealing with ‘hordes’ of laid-off construction workers seeking jobs. ‘There’s many who I thought would never be out of work,’ he said.”

“In Sanford, the town’s status as a place where working families could find affordable homes began to change during the real estate boom, according to Demetria Chadbourne, a Gorham real estate agent who works closely with distressed property owners. Sanford’s proximity to Boston brought out-of-state buyers and developers to the area, pushing up home prices.”

“After the economy crashed, many people couldn’t afford their homes, leading to foreclosures. ‘You went from extremely affordable housing to the craziness of the 2003 to 2006 era,’ she said.”

“Randy Bryant traveled here from Overland Park, Kan., in search of ways to survive the worst downturn he’s seen in the new-home market in the 18 years he’s been a builder. ‘So far, nothing,’ he said yesterday outside Professional Builder magazine’s Show Village Home in the parking lot of Las Vegas’ convention center.”

“An estimated 60,000 fellow builders came to this year’s International Builders Show looking for the same thing - some clue on how to get business rolling again. Bryant, who builds houses priced in the range of $800,000 to $1.5 million, said prospective buyers still showed up to look, but ‘there haven’t been a lot of deals lately.’ He has not been building much, but he could not start a house if he wanted to ’since lenders don’t want to finance spec homes.’ So he watches and waits, ‘doing a few remodels and a commercial loft project. . . . I’m not turning anything down.’”

“More than two dozen builders have suspended operations in the Dallas-Fort Worth area, analysts estimate, leaving some homebuyers and new owners in the lurch. Dallas housing analyst Ted Wilson said that even builders who don’t make business mistakes can be shut down when they can no longer borrow money. In some cases, lenders are even demanding repayment of loans that are in good standing.”

“‘You can have the best-run company now – good product in good locations – and all that’s out the window,’ said Wilson. ‘At the peak of the market, we probably had 80 or so production builders in the Dallas-Fort Worth area. We probably have lost 25 or so of those already. Layoffs have been rampant throughout the industry,’ Wilson recently told a meeting of real estate execs. ‘Not a day goes by that I don’t hear from someone who’s out of a job. We could more than fill this room.’”

“In Fort Worth, 9,017 houses were sold last year through November, nearly 3,000 fewer than the peak number sold in 2006, according to figures. Jim Gaines, with the Real Estate Center at Texas A&M University, said he expects sales for 2009 to return to levels seen in 2002 and 2003, when between 7,300 and 7,700 houses were sold. ‘It’s not a market that is out of whack or out of balance,’ Gaines said. ‘The key that’s going on in our soft housing market today is the fall of home prices.’”

“Already more than a year old, the U.S. recession could run another six to 12 months but spare Colorado its full wrath, according to economic forecasts presented Wednesday morning. ‘This is a little bit like having the coolest seat in hell,’ joked Tom Clark, executive VP of the Metro Denver Economic Development Corp., about Colorado doing better than other states in the worst downturn since the 1930s.”

“Although many economists expect a national recovery to emerge by the third quarter, VectraBank Colorado economist Jeff Thredgold said he leans toward a recovery starting in the fourth quarter. ‘We are going through a deleveraging of a financial house of cards built up over 10 years,’ he said.”

“The bank that financed the new W Scottsdale Hotel and Residences has begun foreclosure proceedings, the latest in a string of legal and financial woes for the high-profile project. Several subcontractors also have filed liens against the hotel, and a couple followed up with lawsuits. They all likely will now have to get in line. ‘Contractors can be left holding the bag,’ said Ron Messerly, a partner in the Phoenix law firm of Snell and Wilmer.”

“Another venerable name in Sacramento-area home building is apparently on the ropes. Irvine-based John Laing Homes, consistently in or near the top 10 for area builders in recent years, ‘is currently reviewing all potential options to meet its capital requirements,’ says the firm.”

“The ominous statement is the newest among pronouncements that have clobbered Sacramento’s home-building sector in recent months. Several builders have collapsed, gone bankrupt or simply mothballed developments until the storm passes. But John Laing Homes, thought to have some of the industry’s deepest pockets, may be the most unexpected so far.”

“Global press reports indicate that a much-heralded 2006 deal, in which one of the world’s largest real estate developers, Dubai-based Emaar Properties, bought John Laing Homes for $1.05 billion, has gone sour. Plans were to use Emaar’s deep pockets to expand Laing beyond its traditional markets in California and Colorado. Now, with the U.S. housing market stumbling, the builder is reportedly a drag on Emaar’s bottom line, which is also suffering from falling real estate values in Dubai.”

“In at least five Sacramento-area ZIP codes now, bank repos have driven median sales prices below $100,000, reports MDA DataQuick. Here’s a look at those December median prices: $64,000 in Sacramento’s 95814, down 60 percent from a year earlier. $68,500 in Sacramento’s 95815, down 63 percent from December 2007. $70,000 in Sacramento’s 95824, down 58 percent from a year earlier. $87,500 in Sacramento’s 95838, down 43 percent from the same time in 2007.”

“The worst year on record for the Las Vegas housing market is over, and the question now is whether it can sink any deeper in 2009. It’s a possibility that many experts suggest is highly likely. ‘I don’t think anybody could have predicted that we’d see a 33 percent drop in prices in 2008. I’ll confess I did not see that coming; nor did a lot of other people,’ said Larry Murphy, president of Las Vegas-based SalesTraq. ‘I don’t claim to be an expert on Las Vegas housing. I’m a student of the market, and it’s taught me a lot.’”

“The resale median price in Las Vegas peaked at $283,000 in 2006 and has come down dramatically since then, Murphy of SalesTraq said. Homes under $200,000, generally considered entry-level homes, made up 83 percent of the market in 2003, he said. That was diminished by one-third in 2004 and again by one-third in 2005.”

“‘We were anticipating the demise of the $200,000 home, that it would become extinct,’ Murphy said. ‘We buried the $100,000 home two years ago. Wayne Laska of Storybook Homes now has a new 1,200-square-foot home for $89,900 in northeast Las Vegas. We suddenly have affordability again in Las Vegas and that’s a good thing.’”

“Fort Myers/Naples is the second most overbuilt market in the nation for subdivision homes, according to a report released Thursday. ‘Florida leads the nation as the most overbuilt, with 12.6 months of finished vacant inventory in South Florida, 10 months in Naples/Fort Myers, and 9.2 months in Central Florida,’ said Brad Hunter, chief economist of consulting for Metrostudy.”

“Hardest hit, he said, are the areas such as Lee County where a lot of homes were built by speculators in the construction boom that ended in late 2005. ‘It’s also a feedback effect,’ Hunter said. ‘Housing starts got trimmed back because demand fell from unrealistic levels and then, as those cutbacks to the home builders’ side rippled through the local economy, that further negatively impacted demand and we’re still in the grips of that downward spiral now.’”

“John McIlwain, senior resident for housing at the Washington-based Urban Land Institute, said the underlying problem is that for several years in the boom the country built more than 2 million new housing units a year, far more than the 1.5 million to 1.7 million that were actually needed. Now, he said, only 800,000 to 900,000 are being built but it’s hard for prospective buyers to step up: ‘We’re not working through the inventory the way you’d expect us to.’”

“A year ago, condos in downtown Salt Lake City were selling at a fast clip, averaging more than one sale per day. The average time a condo was on the market before a buyer snapped it up was 28 days, according to figures from the Salt Lake Board of Realtors.”

“Sellers were in the driver’s seat. Sale prices were 100 percent of list prices, suggesting buyers had little ground to negotiate a deal. Twelve months later, the condo market is upside-down. It’s a buyer’s market — except there are no buyers. Sales ‘went from full throttle to a standing halt,’ said Babs De Lay, a downtown real estate agent.”

“Tahoe Basin real estate pockets are uncharacteristic of the states and counties they occupy, local real estate agents say. Back when properties were being purchased by speculative buyers in areas like Reno and Las Vegas, the existing market allowed these buyers to flip the property for profit, said Chris Plastiras, Owner of Lake Shore Realty in Incline Village.”

“Now, however, in the heart of the housing crisis, those buyers are realizing they can no longer make a profit and they are simply walking away. ‘Buying property and flipping it for profit was definitely an option for a while,’ said Plastiras. ‘But now that has all gone away and those markets have suffered dramatically.’”

“In some areas, foreclosure rates are so high that current prices reflect what they were nearly a decade ago. ‘There’s a huge difference when you hit Sacramento,’ said Kelly Smith, a Realtor in Carnelian Bay. ‘There are so many foreclosures there that prices have stepped back seven years.’”

“While the foreclosure problem is not as bad in Tahoe as it is in other areas of California and Nevada, realtors are beginning to see the need to cater to ‘distressed properties’ in their listing service. The Tahoe Sierra Board of Realtors approved a field in their MLS database last week that will include properties sold under ‘distressed conditions,’ including foreclosures and short sales, said John Falk, Legislative Advocate for the Tahoe Sierra Board of Realtors.”

“Behind the housing boom and bust was one of those alluring but undefined phrases that are so popular in politics– ‘affordable housing.’ It is hard for me to know specifically what politicians are talking about when they use this phrase. But then politics is about evoking emotions, not examining specifics.”

“In looking back over my own life, I find it hard to think of a time when I didn’t live in affordable housing. When I first left home, back in 1948, I rented a room about 4 by 8 feet, costing $5.75 a week. Since my take-home pay was $22.50, that was affordable housing.”

“In 1969, I rented my first house, which I could now afford, after several years as a faculty member at various colleges and universities. A dozen years later, I began to buy my first house. While the specifics will differ from person to person, my general pattern was not unusual. Most people pay for what they can afford at the time.”

“What, then, is the ‘problem’ that politicians claim to be solving when they talk about creating ‘affordable housing’?”

“What they are saying and doing usually boils down to trying to enable people to choose what housing they want first– and then have some law or policy where somebody else, somewhere else, somehow or other, makes that housing ‘affordable’ for them. If you think it through, that is a policy for disaster.”

“We cannot all go around buying whatever we want, whether or not we have enough money to afford it, and have somebody else make up the difference. For society as a whole, there is no somebody else. But of course political slogans are not meant to be thought through, are they? They are often an emotional substitute for thinking at all.”