The Housing Bubble

Another look at the media and the housing bubble, in the southwest.

The good:

The Denver Post, March 2005: “‘Lenders started giving money to people, and it’s gotten out of hand,’ said Jeannie Reeser, public trustee of Adams County. ‘I am talking to people who have jobs, but their income doesn’t come anywhere close to matching their financing.’”

“Soaring foreclosure filings in Arapahoe County for the first three months of this year helped drive metro Denver’s foreclosure rate 34 percent higher than the same period of last year and 30 percent higher than the fourth quarter of 2004. The rate represents 1.3 percent of 125,325 single-family, owner-occupied houses in the county.”

“One mortgage lender says…’Everybody has to have what they want right now, no waiting, no saving up,’ he said. ‘Credit is so loose today that I can buy the groceries I need on a credit card, eat the food tonight, discard the food by tomorrow at noon and finance my debt on a 30-year, amortized loan. How stupid is that? But people do it all the time - and then they wonder why they’re in foreclosure.’”

Rocky Mountain News, May 2005: “In the Boulder-Longmont area, 54 percent of loans made last year were interest-only, up from 11 percent in 2002. In Denver, 50 percent of loans in 2004 were interest-only, up from 6 percent in 2002. Wil Armstrong, of a mortgage firm, said it was too early to know whether the interest-only loans will produce fallout. ‘It wouldn’t surprise me to see these have a higher delinquency rate, ultimately.’”

“‘There’s not a cushion there if the market were to soften,’ said Ira Litke. ‘A high percentage of them are highly leveraged.”

Dalllas Morning News, May 2005: “To say that local prices won’t fall simply because they’ve risen more elsewhere is equally naïve. In fact, a lack of appreciation in a market like Dallas can be downright toxic, especially if new supply continues to flood the market.”

“Too often, local readers e-mail that they can’t get their 1- or 2-year-old home appraised for what they paid. All the while, new developments keep popping up as fast and as far as the eye can see. Teardowns are occurring at a pace last seen just before the late 1980s crash.”

“‘There is an enormous demand for investment real estate,’ Joe Milkes said. ‘As a result, prices are getting pushed up.’ It’s becoming more common to see a single buyer gobble up a dozen homes at a time at new developments. Add a bit of speculation to the supply and demand and you get a partial explanation for why local foreclosures remain so much higher than the rest of the country, and why it’s dangerous to assume that there’s no downside risk in local home prices.”

The East Valley Tribune in Arizona, April 2005: “Jackie Cole, a RE/MAX agent, said ’she recently sold a former rental property that was in ‘terrible condition. It came out on the market at $445,000. We had people bidding against each other and the sale price ended up at $545,000. This is the craziest I’ve ever seen it.’”

The Arizona Republic, April 2005: “As prices continue to climb there, the Ahillens say they are forced to look at smaller homes and act more quickly. ‘You find if you don’t act now, you’re going to get priced out of the market.’ The Ahillens said they want to keep the home they now own in Tempe as an investment for their 3 1/2-month-old son’s college education, which means they need to finance 100 percent of the purchase price in Gilbert.”

“Joi Belinda said an adjustable-rate mortgage, with its lower interest rate initially, could help her get into a house. The 35-year-old, who is renting a townhouse, says lowering interest by as little as half a point would make a big difference. ‘That half a point is money I can save.’ Still, she said that although buying a house is ‘definitely a hot thing to do, I feel kind of nervous about the market.’”

“Erik Lutz, president of Great Southwest Mortgage, said that six years ago, few of his company’s customers took interest-only mortgages because they would have had to buy points or pay down the interest rate. That isn’t the case anymore. About 70 percent of the mortgages his company did then were fixed rate. That figure has dropped to about 30 percent today. ‘People spend 45 to 50 percent of their earnings on housing. This is very dangerous, because it doesn’t provide a financial cushion. People are counting on housing appreciation to be their savings,’ Lutz said. “The homes need to appreciate, otherwise there is no savings.’”

“Not only are homeowners counting on appreciation, Lutz said in many cases people are taking the money they would have been forced to save and using it to buy a bigger house.”

AR April 2005: “‘I think it’s a lot of investors putting their houses on the market at the same time,’ said Brett Barry. ‘There are quite a few vacant, on lockbox,’ said Doreen Drew, an Anthem specialist. ‘There are quite a few with no landscaping, no window coverings, no ceiling fans, on the rental and for-sale markets. That tells me they are investor homes.’”

“Anyone with even a mild interest in Phoenix’s housing market is on alert for the first sign of investor selling.”

KVVU TV, February 2005: “A story of some people who found themselves on the wrong side of a home price bubble. ‘They claim Pulte burned them by inflating it’s home prices and steering them to in house lenders who were all too happy to underwrite their dreams’…’We came with the hopes of buying two houses. We left the first day owning four. Within the next week, owning 6 — all the way up to 19.’”

The Sierra Sun, April 2005: “In a region where million-dollar homes are springing up alongside world-class golf courses, Esteban and Leticia Lopez and their three boys live in a $6,000 pull-behind trailer the size of two Chevy Suburbans. At the back of the trailer, Esteban explains his family’s housing dilemma…He voices the conclusion he has come to in the 12 years since he moved to Truckee from an agricultural town in Oaxaca, Mexico. ‘This area,’ he says, ‘is for rich people.’”

“Many of these residents are not newcomers. Some have lived in town for over a decade. Ruth Hall, director of Sierra Nevada Children’s Services for eastern Nevada County, says Truckee is in danger of losing its workers. And if Truckee loses its workers, the town will lose its soul. ‘Because of the housing situation in Truckee, families are dispersing,’ says Hall. ‘Families are being forced out of a place that they have lived for a long time. It seems like we are making some families make unsupportable choices.’”

The bad:

Arizona Republic, May 2005: “Titled ‘A light at the end of real estate tunnel’…Jay Butler, director of the Arizona RE Center said many converted condos in the Valley are now being bought by investors who then want to turn around and sell them for a profit. ‘Every major investor is looking at Phoenix’s apartment market now, trying to find a condo-conversion project,’ said Brad Goff.”

“Angela Prestinario moved into her north Scottsdale conversion two weeks ago. She bought the three-bedroom condo last year for $210,000; now they’re selling for $270,000. She wants to buy another conversion as an investment. Prestinario, 25, who works in her family’s laser-tag business in Mesa, said she was tempted to sell but didn’t because it took her months to get the place. She was fifth on a list of people, including investors, who wanted to buy that unit but the other names fell away, and it fell to her.”

“Now, she wants to buy another conversion as an investment.”

“‘You are building equity if you get in at the beginning,’ she said. ‘It’s the same sort of thing with a new build on a house.’”

“Emily Haradon wasn’t sure she could afford north Scottsdale when she started looking for a place there last year. A big house was out of the question in a part of metro Phoenix where home prices easily run higher than $500,000. But Haradon, 27, an administrative assistant for Paradise Bakery & Grill, found a solution: an apartment building being converted to condominiums. ‘I was in shock,’ she said. ‘I loved it. It was in my price range. I made an offer the day I saw it.’”

“Haradon said a condo like hers in her complex is on the market for $164,000, a more than 38 percent markup since she bought. For many people like Haradon, buying an apartment converted to a condo is their best chance to become a homeowner or afford a home in higher-priced areas such as Scottsdale. Condo conversions are helping buyers move into neighborhoods where they couldn’t afford a big house.”

“Rising Valley home prices have shut the door on many wannabe first-time home buyers and forced others to purchase houses far from where they work. Converting apartments to inexpensive condos has helped ease the shortage of affordable housing in other large cities, including Los Angeles, New York, Chicago and San Diego.”

“Tyler Anderson, a broker who specializes in multifamily properties at CB Richard Ellis, said there also are conversion deals cooking in Mesa, Tempe and Ahwatukee Foothills. ‘We are just getting started on this,’ he said. ‘I think it’s going to continue.’”

“Just a couple of weeks ago, Montecito Investment Co. of Jacksonville Beach, Fla., paid $97 million for 679 apartments in two Phoenix complexes. Those buildings will be the company’s third condo conversions in the Valley. The Phoenix area hits Montecito’s targets for job growth, lots of second homes, and pre-retirement buying. Larry Bassani, the company’s marketing director, said he doesn’t think conversion is a housing fad.”

“‘We think that’s a price-point lifestyle that will be very attractive for years to come, no matter what the overall market is doing,’ he said.”

May 2005: “Downtown living is suddenly very hot, with more than 1,700 residential units just opening, planned or starting construction soon. And the biggest fuel to the fire is the Arizona State University Downtown Phoenix Campus.” Consider that units at 44 Monroe start at about $300,000 for a 780-square-foot space. The new Portland Place Condominiums also start at the low $300s and run up to more than $1 million.”

“About 90 people signed conditional sales contracts in the past two weeks for units that range in price from $199,000 to $965,000. Eddie Chang is among them. The 25-year-old apartment broker snapped up a two-bedroom, 2 1/2-bath unit on the eighth floor. ‘To me, it was a no-brainer,’ said Chang, a self-described Diamondbacks fanatic. ‘Phoenix is true urban living.’”

“The city’s downtown plan calls for as many as 10,000 units in the next decade.”

Tri-Valley Central, April 2005: “‘It’s public confidence in the economy, and the feeling that prices are going to escalate, so they better buy now,’ said Judy Lowe, Tucson Association of Realtors president. ‘Also, it’s believing that real estate is the best investment.’”

“Richard Kenney, an agent, said people are losing confidence in the stock market and looking to real estate as the better place to put their money. ‘People like the idea of having something they can see and touch and rely on themselves, rather than the paper money and the stock market.’”

“‘Our buyer demand far outstrips the number of available houses out there. It’s kind of scary,’ said (agent) Michael Smith.”

The Star Telegram, April 2005: “Home building, long a fragmented business with scores of small players, continues to consolidate around its large publicly traded companies. D.R. Horton, Pulte, Lennar, Toll Brothers, Centex and about half a dozen others have distinct advantages, which become more pronounced in a tough market. They have deep pockets to buy land and wait out the long permit process in many cities, and they enjoy economies of scale on everything from kitchen appliances to raw land.”

“Because it has the most lots and inventory across the country, D.R. Horton is more vulnerable to a housing glut. As long as a downturn doesn’t happen everywhere at once, it can remain the aggressor.”

The Albuquerque Tribune, April 2005: “In Los Angeles, the rate of return is about 4.5 percent. In Albuquerque the rate is from 5.5 percent to 7 or 8 depending on the property. ‘We’re meeting with at least one new West Coast person a week looking to get into this market,’ Romero said. ‘They’re looking for tax-deferred 1031 exchanges. Investors are bailing out of California in fear the bubble there will burst. They’re moving their equities out.’”

The Vail Daily News, April 2005: “The Vail Board of Realtors’ multi-listing service that tracks available properties showed 572 residences for sale on Monday. Combine the tight housing supply with the fact that there are 650 real estate brokers in the county, more brokers than property, at the moment, and it makes for a highly competitive real estate sales environment. ‘It’s a bit of a dogfight for listings right now.’”

“Don’t look for the stream of free-spending resort-real estate buyers to slow to a trickle any time soon. The cash-rich Baby Boom generation may continue to flood the market with buyers for a decade or longer. Minturn is preparing for a luxury 1,400-unit community. More residential and commercial development is planned near Eagle and Gypsum. Some of those proposed properties have been sold even before a single shovel-full of dirt has been moved.”

From KVBC, May 2005: “First it was the housing market, now it’s the condo market. It’s almost a given in Las Vegas, buy low and sell high. But Jim Snyder has a story that one attorney says could badly hurt the condo market in Las Vegas. ‘Imagine my disgust when I get a similar package in the mail that says, it’s not a half a million dollars any more, it is eight hundred and seventy-four thousand,’ (he) said.”

“They all attended a Vegas Grand sales event, put down anywhere from five thousand to 25 thousand dollars and signed letters of intent to buy a unit. That all screeched to a halt when they got a notice in the mail telling them they had two options: pay a revised price almost double the amount they agreed to, or get their deposit back with five percent interest. ‘Personally, my feeling is, they have dollar signs in their eyes and they know that if they can get rid of me they’re going to make a whole lot more money off my unit.’”

Market observers and reporters, you decide:

Danielle DiMartino, May 2005: “Richard Fisher, president of the Dallas Federal Reserve, noted that many areas of Texas have seen resurging economic growth. Dallas was not one of them. ‘The weakest spot is North Texas,’ Mr. Fisher said, ‘largely because of the hit that telecom, technology and aviation took.’ ‘And yet ‘builders just keep building,’ said David Houston. ‘The risk is not so much the prices of the homes themselves, it’s the loans being made on the homes. The danger I see here is that people are buying so much more home than they can afford.’”

“Jim Pearson of Pearson Appraisal Co., ‘This is where you’re seeing a lot of the problems, where irresponsible or downright fraudulent lenders are trying to find unethical appraisers to work with them. What will happen when those loans are stress-tested, if the local economy doesn’t improve, if the national economy falters, if interest rates rise?’”

DM, May 2005: “Over half of the new mortgages originated in the second half of 2004 were ARMs with lock-ups of less than three years. You’ll have a LOT of inventory flooding the market in a matter of years. I wouldn’t want to be one of the people coming in behind these sellers as those with 5 and 7 year locks rush for the exits all at once.”

“So-called ‘investors’ are buying up properties in McKinney and doing cash-outs simultaneously with the original closings, all based on fraudulent appraisals, yes, this kind of stuff even goes on in non-bubbly Dallas, the damage all of these criminals are inflicting on communities is abhorrent…the same fraud that’s going on on a national level is taking place here..Local foreclosures are three-quarters of the way to their 1989 record. Inventories have been north of 6 months for a long time, we are definitely in a buyer’s market and the credit standards are even worse today than what they were in the years leading up to the S&L crisis.”

“When the wheel stops spinning, we’re going to be sitting on a massive mountain of debt..debt loads could easily bring deflation on in a slowing environment and the Fed knows it, that’s why they would tell you, strictly off the record, that they HAVE to keep raising rates so that they have the needed ammo when the time comes to fight deflation.”

May 2005, “Texans aren’t likely to get trapped in a home price bubble. That upbeat assessment comes from a company that ranked Austin and Dallas as the No. 1 and 2 ‘high-risk’ cities for home price declines two years ago.” ‘Your home price appreciation has been pretty weak’ compared with the rest of the country, said economist Marco Van Akkeren of PMI Mortgage Insurance Co. That’s why Dallas is now ‘toward the bottom of our list’ in risk.”

“Most North Texas homebuyers have ignored the bugaboo talk about bubbles, said Sheila Rice of Virginia Cook Realtors. ‘They didn’t see any reason why it should be true. The price per square foot even in our most high-priced areas does not approach what it is on the coasts.’”

April 2005: “Economist Tucker Hart Adams argues that since 1999, builders have constructed more than 20,000 too many homes in the metro area. Builders pulled 3,181 permits for homes, condos and apartments in the Denver area in the first two months of the year, about 35 percent more than through February of 2004. ‘It’s the worst news I’ve heard all day,’ economist Tucker Hart Adams said. ‘Who is living in all of these homes?’”

One builder. ‘The homes are being absorbed into the market,’ he said. “Builders are building to meet demand. That has been my mantra and it continues to be my mantra.’”

May 2005: “Last year, 28 of every 1,000 Utah households filed for bankruptcy, twice the national average and nearly triple Utah’s rate a decade earlier. In April, Thomas Monson, the (Mormon) church’s second-ranking leader, said he was ‘appalled’ at advertising for home-equity loans that is ‘designed to tempt us to borrow more in order to have more.’ He repeated the words a Mormon elder spoke during the Depression: ‘Interest never sleeps nor sickens nor dies. Once in debt, interest is your companion every minute of the day and night.”

April 2005, “The average number of days a southeast Valley home was on the market jumped from six days in January to 35 in February, according to the Arizona Regional Multiple Listing Service. ‘You get a little carried away by the price of the home, and the overpriced stuff stays on the market. There are indications (that is happening), but nothing in evidence yet,’ said Jay Butler, director of the Arizona Real Estate Center at Arizona State University.”

“He said people seem to be getting more nervous and wondering if or when the market will crash. ‘Things are so good in the minds of a lot of people and they all know that sooner or later it is going to end, and they don’t know when it’s going to end..They don’t want to be hung up to dry.’”

April 2005: “Median home sale prices in Phoenix went from $128,500 in the first quarter of 2004 to $159,400 in 2005. Even if the market’s growth does slow, Realtor Carol Boles doesn’t think the prices will drop. ‘I just don’t see that happening,’ said Boles, who owns Firebird Realty in north Phoenix. ‘I’m still investing in real estate at today’s prices. If I had any indication (that prices would drop), I wouldn’t.’”

“Phoenix’s limited housing inventory and high selling prices have created an undesirable situation for many buyers, Boles said. ‘A lot of first-time buyers are getting squeezed out of the market,” she said. ‘You have to offer over the list price.’”

“‘”Historically, the first quarter is not one of the stronger quarters,’ said Jay Butler, director of the Arizona Real Estate Center. ‘So, by having a strong first quarter, that shows evidence the market is continuing to move along in growth. If you own a home and want to sell it, you have to turn around and buy a home to replace it,’ Butler said. ‘It could be difficult to (find a replacement home), so some home buyers stay either out of desire or are forced to stay with the home they have because they can’t replace it.’”

May 2005: “‘The market here is just absolutely nuts,’ says Pamela Harness, realtor in Chandler, Ariz. ‘I get investors calling; they want to buy a home. I tell them they’re a day late and a dollar short at this point.’”

May 2005: “No Arizona cities meet the Federal Deposit Insurance Corp.’s list of boom markets, those showing 30 percent total price gains, inflation-adjusted, over the past three years. Stephen Happel, an economics professor at Arizona State University, thinks such conditions persist in other states and he sees local warning signs too. ‘I can’t see how housing prices can keep going up,’ Happel said.”

April 2005: “Dawn McLaren an economist at Arizona State University: ‘The concern that I have is that most of our job growth is in terms of construction. In Las Vegas, for instance we’re seeing houses prices 40 percent above what they were last year, an incredible boom going on in prices and in a number of houses being built. And we’re going to have to think about retraining some of these people when that huge boom comes to an end.”

“I do feel that we do have a little bit of a bubble here, certainly in some areas like Las Vegas it will be a little bit worse. There are things that are threatening to it. First of all, over 20 percent of our market here in the Phoenix area is in investment. Investors have come in, they’ve come in from California, and they have been (driving) our market.”

“It can’t go on forever and there are signs that it is beginning to fizzle.”

April 2005: “Even a moderate rise in interest rates could cause a housing price correction that would affect home owners increasingly reliant on home appreciation as a source of wealth, local real estate expert Rick Pederson said Tuesday. Pederson, president of Foundation Properties Inc., said homes have become ‘our savings of choice.’ He’s concerned about consumers relying too much home on appreciation — or their belief about future appreciation — as they make decisions about spending and debt.”

“‘I believe far too much money is going into residential real estate,’ he said. ‘A good deal of consumer spending is going into what I think my house is worth.’”

“Pederson said adjustable rate mortgages (ARMs) have become more common in recent years, but what concerns him more arethe number of borrowers who have taken out larger home mortgages, called ‘jumbo loans,’ on an interest-only basis. ‘We are relying so much on home appreciation,’ he said.”

“Pederson has concerns about commercial real estate as well. In metro Denver, the office vacancy rate has hovered around 20 percent for the past three years, while commercial sales prices continue to rise. Pederson suggested real estate is overvalued, saying that high vacancy rates and simultaneous rising prices doesn’t make sense.”

March 2005: “WHITE HILLS, Ariz. This could very well be America’s next great bedroom community. A city or something like it could blossom in this no-man’s-swath of northwestern Arizona as the nation’s hottest housing market — Las Vegas — begins to spill over its traditional borders. Already, two developers are talking up plans to build 55,000 homes in this sand-scoured landscape that now boasts less than six people per square mile. Several other builders are quietly buying up land. ‘It can’t grow that big,’ scoffed Pat McGinnis, a retiree from Missouri who operates a roadside gift shop in neighboring Dolan Springs.”

“It’s a typical reaction in the rapidly changing West — and it’s almost always wrong, said Rob Melnick, director of the Morrison Institute for Public Policy at Arizona State University. With housing prices soaring in most of the region’s metropolitan areas, the most desolate places are now the hottest spots for development. ‘Thirty years ago, if you had said there will be this huge growth out here, people would have laughed their heads off,’ said Melnick, an expert in urban growth. ‘We’re poking into all kinds of areas that you wouldn’t have believed.’”

“‘You have to look at the available land supplies, what is available for private use,’ said Frederick E. Chin, chief operating officer for Las Vegas-based Rhodes Homes. By the time the bypass is completed, Rhodes plans to be well on its way to building more than 20,000 dwellings on the 2,000 acres it now owns here, along with an ‘urban center’ of retail development and other services. If the homes were already in place today, Chin said, they would probably be priced in the mid $100,000s, compared with the high $300,000s commanded by similar properties in the Las Vegas Valley. ‘We look at this [area] as a viable alternative for a lot of the employment that is going to happen’ in Las Vegas, he said.”

“Pat Kwast…a cook at Rosie’s Den on U.S. 93 (is) not fond of the changes but says she’ll weather them, maybe get to make some jokes at the ‘city slickers’ she sees plopping down $80,000 for a little house. ‘Sweetheart, it’s progress,’ she said with a sigh, taking a break at the counter. ‘Things change — that’s the energy of everything. Everybody knows you can’t stop progress.’”