October 30, 2006
Chicago Business reports from Illinois. “Like the opportunists who quit their jobs to become day traders during the ’90s tech-stock bubble, a herd of amateur builders in this decade has stampeded into the residential construction business, lured by years of booming sales and rising prices. These newbie developers have contributed to a flood of spec buildings that has, in turn, pushed the number of unsold new homes to its highest level in at least 17 years.”
“In the third quarter of this year, the inventory of finished, unsold homes in the Chicago region reached 5,499, a 13% increase from the second quarter.”
“Jeff Moudry broke ground on his first house in February. Mr. Moudry started construction on spec, but was so confident he could sell the house, a brick-and-stone four-bedroom in southwest suburban Shorewood, that he quit his job to work full time on the construction.”
“Eight months later, Mr. Moudry has seen the torrid pace of home sales in the area slow drastically, and watched the inventory of unsold homes pile up, including another spec home for sale right next door for $649,000, his asking price. ‘It is a scary market for people just getting into the business,’ says Mr. Moudry. ‘It makes you nervous thinking winter’s coming and I’m going to sit on it all winter.’”
“Of the 14 active listings for the subdivision, all but one are spec homes, says broker Nicolette Berardi. That’s a problem for Mr. Moudry, who is paying $3,800 a month on the $500,000 loan he took out to buy the lot and build the house.”
“It looks like the end of a great housing boom that began in the mid-1990s, making thousands of homeowners wealthy and fattening profits at related businesses, from mortgage brokers to construction contractors.”
“Jim Venhuizen feels the sting of Chicago’s worsening housing slump about 10 times a day. Mr. Venhuizen, the owner of Cimarron Construction Inc. in New Lenox, takes that many phone calls from unemployed carpenters looking for work. Some are former employees he was forced to lay off in recent weeks as his business slowed along with home sales and construction.”
October 27, 2006
Apartment rents and demand are soaring nationwide as the economy produces good jobs and people who might have bought homes a year ago settle for apartments while they wait for housing prices to tumble.
In addition, the supply of rental housing tightened in the past year as many apartments were converted into condominiums in places like Florida and Southern California. Some of those units are now returning to rental markets at high prices as owners struggle to sell them.
In the quarter ended Sept. 30, the average advertised rent reached $978, up 3.9 percent over the year-ago period, according to an analysis of 75 markets by real estate research firm Reis Inc. in New York. Some of the biggest increases were seen in Florida and Southern California.
Meanwhile, the nationwide vacancy rate for rental housing dropped to 5.4 percent during the quarter from 6.7 percent in the same period of 2004.
“The market is strong enough that landlords are able to reduce the concessions that they’re offering to new tenants,” said Sam Chandan, Reis’ chief economist. “Even more important, vacancies continue to fall.”
Strong demand in pricey markets
Traditionally expensive rental markets such as New York City continue to see strong demand because so few new apartments go on the market and home ownership is beyond the reach of most people.
October 26, 2006
The Union Tribune reports from California. “San Diego County figures from DataQuick indicated a downturn trend in prices. The median price last month for newly built houses and condos and condo conversions locally was $413,500, down 17 percent from a year earlier, with analysts speculating that much of this change was the result of an increase in lower-priced condo conversions.”
“On sales, DataQuick said San Diego County’s new-housing total was 885 transactions last month, 37.5 percent lower than in September 2005.”
The Press Enterprise. “Inland economist John Husing said homebuyers won’t become active again until they are convinced it is a good time to buy. ‘What the market is facing is a buyers strike, and until buyers see prices come down they probably are going to stay on strike,’ Husing said.”
The Contra Costa Times. “Solano County homes stayed on the market longer than those in any other Bay Area county, according to a report released by Prudential California Realty. Single-family, detached active listings went up 43 percent in the county.”
“Scott Kucirek, general manager of Prudential California Realty, said the trend is fed by sellers refusing to budge on prices. ‘Competitive sellers need to lower prices or risk missing the sale,’ he said.”
The San Francisco Chronicle. “Some economists said the state’s housing market is likely to deteriorate further before it recovers. ‘We haven’t seen the bottom yet, and we won’t see bottom until 2007,’ said econmist Christopher Thornberg. ‘We have a big issue on our hands.’”
“‘You’ve got sellers who are slow to accept the new market realities and buyers that are just kind of waiting for a market that I don’t think they’re going to see,’ said Leslie Appleton-Young, chief economist for the California Association of Realtors.””
Nationwide, homes that sold in four weeks a year ago are now sitting on the market twice as long.
So, to sweeten the deal, sellers are offering: Free furniture, luxury cars, even the use of a private jet.
“The buyers have to be very cautious when they look at these gimmicks out there, because a lot of them are gimmicks, to be honest with you,” says Bruce Hersey with the EH Building Group in Port St. Lucie, Fla.
Another trend: Home auctions are up nearly 6 percent. Some auctions promise to sell a house on a certain date. But it can be “seller beware.”
Byron Meo in Riverside, Calif., wanted $680,000 for his three-bedroom home. He got $200,000 less.
“It was real disappointing,” he says.
But what’s disappointing to sellers is good news for buyers. And real estate experts say they see no signs that will change soon.
Popular in California and now spreading, so-called “staging” sellers pay thousands of dollars to decorate their homes “just for sho
The median price of a new home plunged in September by the largest amount in more than 35 years, even as the pace of sales rebounded for a second month.
The Commerce Department reported that the median price for a new home sold in September was $217,100, a drop of 9.7 percent from September 2005. It was the lowest median price for a new home since September 2004 and the sharpest year-over-year decline since December 1970. The weakness in new home prices was even sharper than a 2.5 percent fall in the price of existing homes last month, which had been the biggest drop on record.
The price decline for new homes came while the sales pace picked up, rising by 5.3 percent to a seasonally adjusted annual rate 1.075 million homes. It marked the second consecutive increase in sales following three months of declines.
The point of maximum deterioration in housing activity has probably passed,” says Jan Hatzius, chief U.S. economist at Goldman Sachs, in an Oct. 20 report. “The sharp downturn of the past year seems to have brought total housing starts—single-family starts, multi-family starts, and mobile-home shipments—close to the level justified by the underlying demographics.”
Permit plunge
Still, Hatzius comes up with plenty of caveats. Housing activity could drop by another 300,000 housing starts, he projects, as homebuilders work off unwanted inventory and buyers shift from single-family units to multifamily and mobile homes. That would come on top of a decline of 400,000 housing starts already, Hatzius says.
Others maintain that the housing downturn still has a long way to go. “Commentary suggesting housing demand is recovering, based on the latest homebuilder and mortgage applications readings, appears to be more wishful thinking than fact,” says Keith Hembre, chief economist at First American Funds, in an Oct. 20 report. Housing may have stabilized somewhat, but it’s probably only temporary, according to David Rosenberg, North American economist at Merrill Lynch. The unexpected September surge in housing starts came alongside a 6.3% drop in building permits to their slowest pace since October, 2001. A decline in building permits has accompanied a rise in housing starts only six times since 2003, according to Rosenberg, and starts fell a month later on five of those occasions.
Grim futures
Rosenberg also differs with Goldman’s Hatzius over demographics. “Our research suggests that this housing cycle does not bottom out until starts reach the 1.3 million mark,” Rosenberg said in an Oct. 19 report. “So contrary to popular opinion, we are barely in the fifth inning of this down-cycle on the construction front.”
So far, futures traders are sticking with the pessimistic view. In afternoon trading Oct. 23, investors were predicting declines over the next 12 months in all 10 markets covered by the Chicago Mercantile Exchange’s housing contracts. The composite index is seen falling 7% by August, 2007, when the one-year contract expires. That’s roughly unchanged from what investors expected a month earlier.
Depending on whom you ask, the winds may already be shifting for the housing market. All year, economists have warned of a bursting housing bubble and its potential impact on economic growth. However, a recent stream of encouraging data has some prominent prognosticators changing their tune.
One of the first in line was Alan Greenspan. As recently as May 18, the former Federal Reserve chairman put an exclamation point on the housing slowdown when he declared, “The boom is over.” But now, the “worst may well be over,” Greenspan was quoted as saying Oct. 7, after mortgage applications posted their biggest weekly gain since June, 2005.
A growing number of economists and analysts have come around to the ex-Fed chief’s view. Some investors may see sunnier skies too, as homebuilding stocks such as Lennar, DR Horton, and Pulte Homes have rebounded since touching 52-week lows in July.
October 25, 2006
his is a topic that seems to come up fairly often and I think is worth exploring: Does the rise of Mortgage-Backed Securities (MBS) and Collateralized Mortgage Obligations (CMOs) represent a true “paradigm shift” in how risk is decoupled from mortgage originators/lenders and transferred to individual investors and taxpayers? Is this a temporary trend soon to follow unprofitable Dot.coms into the dustbin of history, or a true revolution in risk transference?MBS/CMO goal: Privatize profits, socialize risk
We have often derided those in the REIC over the past year or so who have claimed that the unprecedented run-up in housing prices over the last 6 years was a “new paradigm”, i.e., a permanent, historic shift in severing the traditional relationships between incomes, rents and RE prices. But what if there’s a kernel of truth to this?
We must remember that MBS/CMOs are what have made issuing NAAVLPs and I/Os profitable, even with tiny risk premiums, because of that oh-so-critical risk-transference. Even the most toxic option-ARM is profitable to the originating lender –in fact, the fees & points (profits) are far higher on toxic loans than they are on traditional 15/30-year FRMs or amortizing ARMs. If you’re a lender, why wouldn’t you want to take boat-loads of risk-free (for you) money? You’d have to be crazy not to, right? Of course, there’s always the possibility of repurchase agreements or class-action lawsuits if things get really bad, but, hey that’s for some other guy to worry about. You’re in it for the short-term profits and couldn’t care less about the long view, right?
The new MBS/CMO risk transfer model has been working SO well for lenders that I fear only a complete economic meltdown (resulting from it) would deter banks from voluntarily continuing its use in the future. And, as Randy has pointed out, the current anti-regulation/pro-banking bias in government is so strong, involuntary regulations (with real enforcement) are pretty much out of the question –for now.
Greg Sterbens thought his 3-bedroom, 2.5-bath home on a cul-de-sac in wine country was a great deal when he hung up a “For Sale” sign two months ago. List price: $685,000.After a month without offers, Sterbens lowered the price on his 2,250-square-foot home to $660,000. Earlier this month, he reduced the price to $639,000, making it the cheapest house per square foot in his Sonoma County neighborhood.
“We have to be competitive, and we can’t be greedy,” said Sterbens, who is having a home built in Redding. “We’ve had a lot of traffic at the open house, but it seems like people are afraid to buy now. They don’t know where the bottom is.”
Real estate agents and economists say Sterbens - and thousands of other sellers - may have to consider further reductions.
The housing market throughout the state, particularly along the coast, appeared steady earlier this year, despite pronounced downturns in parts of the industrial Midwest and the South. But fresh data show that California’s market is not immune - and may be on the cusp of a long-feared correction.
Throughout California, home values increased at the slowest annual rate in nine years, according to a survey released Wednesday by DataQuick Information Systems.
The statewide median price was $472,000 in August, a 3.5 percent hike over the year-ago period. It was the slowest increase since June 1997, when statewide home prices rose 2.8 percent.
The median price of a California home in four counties actually dropped - a relatively rare event that economists say could be the first of many more months of declining prices.
“You don’t see many declines in California housing historically, but I could see some continuing declines at least over the next 12 months,” said Stephen Levy, senior economist of the Center for Continuing Study of the California Economy. “Typically sellers begin to lower their prices, and that’s when you worry that the bottom could drop out. We still haven’t reached that point, but I don’t see how the economy can continue with these prices.”
The steepest decline among large counties was 6.7 percent in San Mateo County. The median price last month in the county, situated between San Francisco and San Jose and the home of commuters throughout Silicon Valley, was $721,000, down from $773,000 a year ago.
Sales of existing homes fell for a sixth straight month in September and the median sales price dropped on an annual basis by the largest amount on record, further documenting a lukewarm housing market.
The National Association of Realtors reported that sales of previously owned homes fell by 1.9 percent in September to a seasonally adjusted sales pace of 6.18 million units, the slowest sales rate since January 2004.
The median price of a single-family home fell to $219,800 last month, a drop of 2.5 percent from the price in September 2005. That was the biggest year-over-year price decline in records going back nearly four decades.