Vicious Cycle Starts In The UK

The credit cycle is unwinding in England. TimesOnline, "The housing slowdown, reflected in a 35% rise in home repossession orders in the first quarter, is also having a big impact."

"Households, sitting on a debt mountain approaching £1,100 billion, appear to have been clearly affected by the hike in base rates. That effect is compounded by the fact that many mortgage deals negotiated when rates were at a 50-year low are now coming up for renewal. Consumers’ disposable income 'has been chipped away' by tax increases and higher mortgage payments."

"The housing slowdown has cut the amount of so-called mortgage-equity withdrawal. It dropped to £6.9 billion in the final quarter of last year, from £16.8 billion a year earlier. "'You don’t need to have a full-scale collapse in the housing market to produce a slowdown in consumer spending,' said Jonathan Loynes, UK economist."

"Dave Taylor says, 'I think that interest rates will have hit 6% by this time next year. I already pay £900 a month on my mortgage. The choice is to cut back or get deeper into debt by borrowing money and that means credit cards.'"

Sacramento Rents Leave Speculators Short

This SacBee article brings up the issue of rents and you may be surprised who's talking. "It's hard to find a bigger proponent of homeownership than Scott Syphax, head of Sacramento-based Nehemiah Corp. Syphax's advice: Wait it out a year. In that time, he suspects, the market will cool, meaning more homes to choose from and maybe even some bargains."

"In today's market 'it's certainly hard to even think of breaking even in terms of the rents,' said Joan Krizman, a longtime Sacramento investor-landlord whose family owns nearly 70 homes in the east Sacramento and Land Park areas."

"Krizman said the woman, who's been buying homes as rental investments nationwide, was hoping to get $1,200 a month because her mortgage payment was $1,600. 'I hate to disappoint her but I have to. She'll be lucky if it rents for $995 a month.'"

"Rental industry sources say investors from other regions continue to purchase single-family homes here without doing their homework. These investors, including many from the Bay Area and Southern California, are often disappointed to learn that the rents they had hoped to fetch here are hundreds of dollars above market."

"Amateurism" Among New Zealands' "Tycoons"

The New Zealand web site Stuff reports on a poll of homeowners with conflicting conclusions. "The survey found many investors displayed worrying signs of amateurism when it came to managing their investments. (It) seemed to show two opposing property markets had developed in New Zealand - pessimistic owner-occupiers and optimistic buy-to-rent investors."

"KPI editor Gez Johns said: 'The most striking fact is that more than 50% of current and potential investors seemingly couldn't give a stuff about what the economy is doing.'"

"Of those surveyed, 53% admitted to never having done a chattels valuation, and 46% owned their rental property in their own name rather than in family trusts or loss-attributing qualifying companies."

"It found that 47% used equity in their homes to buy their rental properties. 47% bought their first home before they were 30 and 3% said they were 20 or younger. More than a quarter were aiming for tycoon status by owning 10 or more properties."

Another Las Vegas RE Bank Goes Public: Updated

In a replay of the tech boom, here comes an IPO that should be a perfect fit for the real estate speculator. The Las Vegas Sun reports that Western Alliance Banc has filed with the SEC to go public. "If the offering is completed, Western Alliance will be the third Las Vegas-based bank to make a public offering in the past year."

"In 2003, the company has branches in Phoenix, Scottsdale and Tucson, and Torrey Pines Bank which has branches in San Diego and neighboring La Mesa." In other words, some of the riskiest areas in the nation.

"Commercial real estate, construction and land development and commercial and industrial loans, which comprised 88.7 percent of our total loan portfolio as of December 31, 2004." These may be a better short than the home builders.

I response to requests, the two previous IPO's are Valley Bancorp and Community Bancorp. As you can see, investors have been discounting the LV housing market via these stocks for months.

"Who's Going To Buy All These Knockoffs?"

Folks in Baton Rouge have been talking about the large number of homes being built in the area, and now, one fellow thinks he knows why. "Toss in the scores of smaller developments and the condo and townhome frenzy and the number could swell to more than 20,000 units over the next five years, depending on pace of filings and absorption."

"This is all happening at a time when people are fleeing Baton Rouge like Castro was mayor. Last year alone over 1,300 more people left here than moved here."

"So how do you explain it? Those in the business can't, though this notoriously optimistic bunch is quick to say there's no cause for alarm."

"I'm guessing the answer to our real estate riddle rests with area bankers desperate to boost revenues. And in today's climate, the fastest way to serious cash is commercial and residential loans, explaining why anyone with a set of blueprints pretty much gets approved."

Single Digit Price Increase An "Aberration"

This JournalNews piece is full of housing craziness. " The inability of buyers to afford houses appears to increase the demand for lower-priced condominiums and cooperative apartments, pushing those prices up as well."

That's what happened in Orange County. As potential buyers were priced out of what they wanted, they bid up lower quality homes. It really is just a mind game to convince yourself that the $300,000 house is now "worth" $500,000.

"The affordability of co-ops led Kyana Kelley to bid on a one-bedroom apartment for $90,000. She said she hoped to close in the next few weeks. Kelley, age 30, figures to sell the apartment and trade up in a few years on continued price strength. 'It's going to keep rising,' she said."

Think about this chap when a professional talks about being on your side. "Agent Bobby Palazzo said demand in Putnam was being fueled by people moving up from the Bronx, White Plains and Yonkers. 'You can still get something decent up here for under five,' Palazzo said, meaning $500,000."

"'Unfortunately,' he added."

Springtime In Profligate America

The Yahoo Finance page had these headlines Saturday morning. "The Most Expensive ZIP Codes 2005, Travel Like a Billionaire, The World's Most Expensive Yachts, Should Ex-Smokers Worry?"

The CBOE Volatility Index is a measure of investors' risk perceptions, and as the chart shows, that has been headed steadily down for years. This in spite of the many warning signs, chief among them the degrading credit quality of home buyers.

The Toledo Blade reports on speculative building. "A growing number of smaller developers are building 'spec' houses, some with price tags as high as $34 million, without any specific buyers in mind."

"Some economists caution that it could lead to price declines if there is even a slight economic blip. 'These guys typically can't carry these houses for very long, especially these small builders, and then you can get into a fire-sale type situation,' said Thomas Lys."

In the S&L debacle, it was the spec developers who were really wiped out, taking many institutions with them. But on this bright spring day, the public can see no clouds on the horizon. "That's one of the wealthiest generations ever to come into their own in the history of this country,' said Steven Crandall." And in a country that counts it's obligations in the trillions, the most indebted in the history of man.

Housing Statistics From Mother Jones

Mother Jones has a list of statistics on homeowners; here's a sample.

"The National Association of Home Builders’ 'showcase home' for 2005 is 5,950 sq. ft. That’s 15% bigger than last year’s model."

"1 in 5 new homes is larger than 3,000 sq. ft.—the size at which it becomes unmanageable to clean without hired help."

"Only 2.7% of San Francisco’s teachers, 5.7% of its cops, and 4.2% of its nurses can afford to buy a home there."

"1 in 4 Californians are considering moving out of state to reduce their housing costs."

"Since 2001, the number of Americans who have bought second homes has increased by 24%."

Bubble In The Rockies

There may be a housing glut in Denver, but as the Vail Daily News reports the boom is alive and well in the resort town. "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.'"

Is it surprising that the writer thinks this will go on and on? "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."

Camping For Housing Concept Spreads

The Contra Costa Times tells us buyers are sleeping in their SUV's to get to bid on homes. "'In one respect, it's sort of sad that it's come to this,' said Jim Croy, who took a day off work to take the head of the line."

"San Francisco resident Melissa Shanoian persuaded her sister to drive by periodically to see if a line was forming. She and her husband, rushed to the site at 9:30 p.m. Thursday to become fourth in line (for) townhomes that go on sale Sunday."

"'I just made it,' she said. The couple placed a television in their SUV and inflated an air-bed for the night. Shanoian's sister brought her a muffin and coffee in the morning while her husband went to work."

In this case the developers are enjoying the sensation. "The camp-out pleasantly surprised company officials, said DeNova sales and marketing director Debbie Bahr."

"Her husband slept in the van overnight and she stayed there during the day, alternately knitting an orange scarf or reading. 'Right now, the price looks OK, and that's the reason that we're jumping into this. But I didn't know that people do camping for housing.'"

I Went To Orlando And All I Got Was A Lousy Condo

BankRate has a write up on using a vacation to pick up a house. "Maybe throwing back a few Mai Tais and, checking out the local real estate market? That's no way to spend a vacation, many will say, but it may not be such a crazy idea."

"'There are people who come down here with the express desire to go on vacation and they go home buying a house,' says Marcus Truett, a second-homes specialist in Orlando. 'But there are downsides to buying like that, like people overextending themselves or believing in a lot of hype.'"

"Using your vacation to house-hunt is just a smart way to multi-task."

This has actually come up before, so it must be some sort of trend. The modern vacation/house hunt includes due diligence, according to the story. "While you're there: Find the nearest Starbucks."

It's The Gold Rush In Reverse

Everybody is pointing at Californians, now including Hawaii. "An unprecedented boom in the Kauai real estate market is being led by California buyers, according to a study by Data@Work, a Hawaiian resort residential market research firm."

"The study shows California residents as the largest buyer market for all resort properties (condos, single-family homes and vacant home sites) in Kauai, accounting for about 40 percent of all sales on the island."

Negative Equity Loan Puts Firm On Defensive

A mortgage firm in the UK has a negative equity product coming out and they are having to defend the decision. "To a certain extent, the product is ideal for first-time buyers who don’t know who to believe in terms of what is going on in the housing market at the moment."

The growing numbers of foreclosures aren't a worry, says senior technical manager Ray Boulger. "Boulger admits the figures are a source of concern but says none of the lenders he had spoken to have mentioned an increase in repossession activity to him."

"James Cotton, mortgage specialist, (was) asked whether it would be a product he would recommend:'It is difficult to say without all of the details but if people are really concerned about whether they can afford to get a mortgage the best advice is still don’t get a mortgage.'"

Crisis? One In Eight Families Have "Critical Needs"

The Center for Housing Policy has a report out, and it seems they woke up and realized the boom is a bust after all. "Barbara Lipman, the research director for the center, said a full-time job doesn't guarantee families a decent, affordable place to live."

"'The problem seems to be impervious to economic conditions because the number of working families in this situation has grown during the boom-boom '90s and early 2000s,' she said. 'More families are competing for a limited supply of affordable housing. The price is going up faster than the wages of working families.'" She catchs on quick!

"The group found that for every $1,000 families saved on housing by moving some place cheaper farther out, they're only $225 ahead because their transportation costs go up so much. 'Choices are a bit grim, commuting longer distances, working longer hours, having another wage-earner in the family, taking a second job,, Lipman said."

"One out of every eight families in the United States had critical housing needs in 2003, defined as either paying more than half of income for housing or living in run-down quarters. Homeowners now are more likely than renters to have critical housing needs, 55 percent are people who own their homes."

"Think About Retraining" Construction Workers

You can watch, listen or read the discussion on PBS about the bubbling economy; Dawn McLaren an economist at Arizona State University wonders about a common topic in the valley. "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."

Will Ghost Homes Ever Be Built?

IHT.com has a report on the home buying boom. "There was a time when most people buying a new home waited until the house was built to buy it. But over the 12 months through March, only 23 percent of buyers did that. That is a record low."

"Meanwhile, 40 percent of buyers bought homes before the first construction worker appeared on the site. That is a record high." That raises an issue. If all these home sales numbers we've heard recently included these ghost houses, they may never be built if the speculators rush to cancel.

The inventory levels that this blog has reported regularly has shown up on their radar. "Homebuilders seem to think that the risks of not having land ready are greater than the risks of having too much of it. Greg Jensen of Bridgewater Associates, a money management and research firm, put together balance sheets from a group of builders, and found that in 2004 their inventories, largely land, soared to the point that operating cash flow was negative even though profits were up sharply."

"It sure looks like the end of a bubble to us," Mr. Jensen said.

CFC Profit Dives, CEO Makes A Pig Of Himself

At the Yahoo summary page for Countrywide Financial, the headline CFC Financials pops up. Are they really just now getting out December 2004 numbers?

Check out the drop in revenue. And what is that hokey-pokey going on in "Operating Expenses"? Got to be a misprint.

No matter to CEO Angelo Mozilo who is busy selling his stock in the firm, to add to his pile. Why does he like that 52,500 share number so much?

Bubble Blues And Haiku's

With apologies to Jack Kerouac for the title, it's Friday and I have been inspired by all the RE bubble haiku's in the comments lately. Here's one from me and feel free to post your own.

Spider Climb Up Window

Pause In Fear

Drop Like Spider



I know, I know. Let's hear yours!

Who Needs Dry Cleaning In Deep Ellum?

A reader sent in this promotional for "luxury" housing on Elm Street in Dallas. They are throwing in a few perks to spice up the deal.

"1 year membership to Club 48 at the Tower Club, $1,000.00 worth of Bibbentuckers dry cleaning through may 2006, HOA dues paid through 2005 & non-transferable rate guarantee throughout January 2007 of .39 cents a foot, American Home Shield warranty paid for one year, Free membership to the Adolphus Club."

The building has been complete for a while, I'm told, so the aim is to create a buzz in the buyers mind. Deep Ellum is a hip place to party nowadays, at least the police aren't afraid to go down there anymore.

RE Mogul Changes Her Tune

When this blog first covered the founder of the New York-based Corcoran Group, Barbara McCarty, she was pretty sure of herself. "Of course there's no bubble. I think we're just getting started."

What a difference a few weeks makes. "Is the US real estate sector in a bubble market? And if so, is it in danger of popping? 'While some areas will always tend to be more volatile, on a national scope, there's probably no housing bubble.'" Ms. McCarty tells us.

This from the March post. "I think the bubble theory is nothing more than an intellectual expression of people's typical worry that good times can't last forever. When your marriage is going well, you worry there's a problem on the horizon." Has she struggled with success? "Other than my boyfriend and business partner marrying my secretary, it has been my hardest transition."

"Potential To Harm Families" Worries Writer

Danielle DiMartino writes for the Dallas Morning News and gets questions like these;
"•What's the connection between Fannie Mae and Freddie Mac and a housing bubble, if one does indeed exist?
•Assuming it does, when might this bubble pop?
•And finally, why are you so caught up in this issue?"

"Let's say for a moment that all of the credit that's being extended to purchase homes at inflated prices isn't of the highest quality. The proof here locally is that foreclosures have gone through the roof."

"Now extend that scenario to the really hot markets that have yet to suffer flat, not falling, just flat, home prices and you get to what keeps me up at night. Maybe even Alan Greenspan, too."

"How will federally established Fannie and Freddie and all the other mortgage debt holders react to the inevitable rise in delinquencies and foreclosures?"

"I worry about housing so much because of its potential to harm so many families. Stock market bubbles impact those who can afford to buy stocks. When that bubble burst in 2000, that included about 45 percent of Americans. But a record 70 percent of Americans now own a home. So housing bubbles have the ability to inflict much more pain on communities and our broader economy."

Moody's To Examine "Government Related Issuers"

The credit rating firms Moody's and Fitch have had a vague stance regarding the likelyhood that Fannie Mae or Freddie Mac will be bailed out by the US government. "Senior debt ratings...include an assumption of support from the US government that would be provided in the event of severe financial stress".

"If there was a major problem in their ability to issue debt, then the government would have to step in in order to support not just the GSEs but the overall economy as well," Fitch said at the time.

Yesterday, Moody's undertook an effort to formalize the matter and that's a good thing, considering the worlds economy hangs in the balance. "Moody's Investors Service announced today that it plans to examine ratings on various government related issuers (GRIs) by midyear."

"'The Application of Joint Default Analysis to Government Related Issuers,' The guidelines represent an elaboration and systematization of the rating agency's prior approach to rating issuers with full or partial government support. They take explicit account of each GRI's baseline default risk assessment, the supporting government's default risk, an estimate of default dependence between the two entities and the estimated probability of government support."

The list of organizations at the bottom, under US, includes:

Federal National Mortgage Association
Federal Farm Credit Banks
All of the Federal Home Loan Banks
Federal Home Loan Mortgage Corporation
Resolution Funding Corporation..This is what's left of the RTC.

Even Those Who Profited May Lose It All

This article at Citizenet has an example of a young family that made some cash from the housing boom and chose to get further into debt. "Three years ago Greg and Jessica Furr paid $230,000 for a single-family home. They recently sold it for $445,000, pocketing a $215,000 profit."

"The Furrs and their two young children moved into a new, four-bedroom, brick-and-vinyl-sided home. The couple bought the place for the pre-construction price of $380,000."

"We plan on selling this in two or three years..They say we'll get $750,000. It's hard to believe. To make 80 or 100 grand on a house is one thing. To double the value is kind of absolutely mind-boggling."

And what do the Furrs do for a living. "Mr. Furr (is) a 34-year-old general superintendent for a City of Fairfax-based concrete company. Mrs. Furr has since returned to work as a loan officer for a mortgage company. The couple also has a place on the Northern Neck, where they spend most weekends." I hope they don't have a mortgage on that weekend cabin.

ABN AMRO Loans Off 29% Last Quarter

A story over at Inman News reveals another mortgage giant is losing traction. "ABN AMRO Mortgage Group's first-quarter loan production dropped 29 percent from a year ago, the company reported today. The lender's production total for the first quarter of 2005 was $10.4 billion, down from $14.7 billion during the first quarter of 2004."

The chairman had this to say, "The solid growth of our net operating profit compared with the same period last year was satisfactory, despite the much lower results from the US mortgage business." Wasn't the Mortgage Bankers Association telling us how good the numbers were, even when this blog pointed out otherwise?

Media, Congress Need To Wake Up

The warning signs are everywhere that a mortgage/housing fiasco is unfolding and the silence is deafening. Except for newcomers like Cramer, the media isn't covering this debacle or the Doral matter. The home builders having their head handed to them after record existing and new sales, plus record earnings, should put the media on notice that we have a problem.

Perhaps asking the media to quit cheerleading and look at the housing crisis objectively is too much. What of our representatives in Washington? The congress had better be meeting to figure out what the heck they are going to do instead of debating who is more responsible for Fannie.

Housing Bust An Opportunity For Buffett?

This quote is on the last line of the MarketWatch article. "Whitney Tilson said, 'But there are also great benefits in having so much liquidity: The housing market bubble could burst for instance. A crisis like that could create investment opportunities for Buffett.'"

Will the people who manage billions of dollars swoop down on the wreckage after a housing collapse?

"They Better Buy Now"

In Tucson the realtors have been doing so well, they have become arm-chair economist in order to explain their good fortune. "'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.'"

One agent senses something is wrong. "Our buyer demand far outstrips the number of available houses out there. It's kind of scary," said Michael Smith.

Mortgage Lenders "Target Vulnerable Groups"

This blog has consistently denounced the push for subprime loans as a dangerous trend that will place people in over-priced homes with mortgages they can't afford. New York State Attorney General Eliot Spitzer has a different view, but is going after the industry none the less.

"Spitzer..is looking at whether minorities, the elderly and other "vulnerable groups" are being targeted by questionable lending practices. Subprime loans are made to borrowers with lower credit ratings because of past payment problems, high debt-to-income levels and other factors."

It's just another facet of the massive fraud, of course. Mr. Spitzer could have framed it as a doomed effort to keep the market from falling and to profit in the process. Countrywide Financial is a subject of the probe; there may be some justice left after all.

"Few Tools Beyond Language"

It is often said that as long as the Fed keeps liquidity available and rates low, the housing boom will continue. Those voices believe the central bank to have supernatural powers over market forces. For a check on the theory, lets look at Japan, which enjoyed a stock market and RE bubble.

"The Bank of Japan on Thursday officially abandoned hope that the economy would return to inflation before March 2006. Given the bank’s commitment to keep interest rates at zero until deflation is eradicated, it implies a one-year extension of the zero-interest rate policy."

"With interest rates at zero and markets flooded with liquidity, the bank had few tools beyond language to affect market expectations."

Perhaps the reason the Fed and congress are doing nothing about the housing bubble is there is nothing they can do, but talk.

Is The Party Over?

There is a limit to how high home prices can go. The stock market is realizing that in it's reaction to the latest record numbers from the home building sector. Is the multi-year party over?

Fannie Mae Continues Liquidating Portfolio

Fannie Mae continued to scale down it's mortgage holdings in March in a multi-month effort to slim down. "Fannie Mae, the No. 1 U.S. home funding company, on Thursday said that its mortgage investment portfolio fell 13.6 percent in March after dropping 19.1 percent in February."

Just who is buying the mountain of securities hasn't been mentioned.

Centex Sells Land, Mortgage Business Down

The home builder Centex is out with the past quarter and fiscal year results. It is a lot to take in, but here's something unusual. "The housing gross margin improvement was driven primarily by an increase in the average selling price of homes delivered..Additionally, land sales contributed 40 basis points of the 200 basis point gross margin improvement."

So Centex is selling land and that made up 25% of the increase in GM. Let's poke around the mortgage division. "Operating earnings from CTX Mortgage Company totaled $21 million for the fourth quarter of fiscal 2005, 21% lower than $27 million for fiscal 2004's fourth quarter. Originations from Centex Homes' closings increased 4% while retail originations fell 18%. Fiscal 2005 operating earnings from CTX Mortgage Company were $96 million compared to $166 million for the same period a year ago."

That fall could be attributed to a widening credit spread for the firm. "CTX Mortgage provided mortgage loans to 73% of Centex Homes' buyers for the fourth quarter."

Residential Activity "Now Behind Us"

At least one construction publication sees an end to the housing boom. "By mid-year, the slowing trend in construction spending will reappear. The period of peak growth in construction activity in this economic expansion cycle is now behind us."

You don't hear industry types mention the 'B' word very often. "Market by market, be alert for the housing bubble to burst when home prices increases stop and speculators scramble to sell their investment homes."

Don't miss the construction spending table at the bottom of the page.

No Boom For Landlords

The SFGate is reporting that the home price boom is putting the hurt on landlords. "Rental property is usually valued using the cap rate, which is the property's annual operating income divided by its price."

"In the fourth quarter of 1997, when investors would rather own dot-coms than duplexes, the average cap rate was 9.2 percent. 'I can't say it's crazy low or a bubble, but 6.3 percent is pretty low,'" says Alex Peters. With almost 50% of the profit is gone, why would anyone pay more for that?

This might be a clue. "Another source of demand is small-time investors who are getting into real estate. One way they're doing so is through real estate investment clubs. Sherwood always looks at the property before he buys it but says some club members 'just look at a picture on the Internet and invest.'"

Florida On Fire, But Not Miami?

Florida has got the fever as this FAR release indicates. "The Fort Myers-Cape Coral MSA reported a 48% jump in home sales last month. The median sales price rose 43 percent to $246,600."

"Scott Whitlock, president of the Cape Coral Association of Realtors says that the history of how the city was formed contributes to its strong housing market. 'Here in Cape Coral, we have a pre-plotted city of canals that covers 116 square miles. What we have is literally thousands of vacant lots. The area has been extremely affordable.'" A 43% rise is hardly affordable, but what's the rush? It sounds like they have plenty of land.

The FAR report goes on and on about all the increases. But this little snip from Origination News caught my eye. "Among the state's larger markets, resales increased ..but they fell 28% in Miami, FAR reported." What happened Miami?

Home Builders Have Become Land Banks

This Star-Telegram story gives some insight into the inventory that home builders are accumulating. "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."

The plan is that when the market stumbles the major builders will take market share from the little guys. So they see the massive accumulation of land as a brilliant scheme. When you hear that there is no land out there, think of this. "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."

Home builders have turned into land banks and this blog has many posts which reveal the multi-billion dollar buildup in "inventory".

Land Price Boom Changes Economics In Florida

As with any financial distortion, the side effects are not just what happens, but what doesn't happen. In the case of Florida, former affordable housing firms are quitting. "For-profit affordable housing builders can make more money flipping land."

"Continental's Castiglia said he worked with one community development corporation, generally called a CDC, which bought land in Miami's Allapattah neighborhood for $250,000, but spent three years trying to pull together the financing. The project fell apart and the land sold for $1.9 million."

"'Why take the risk and make 20 percent when you can make 100 percent or more?' Castiglia said."

"Some say the overbuilding of condos will create new rental inventory, but that won't benefit low-income households, Gonzalez said. 'It's absolutely not true that this will be future housing stock.'"

Wealth Cannot Be Printed

This editorial at MNDaily does an excellent job of taking down the idea that asset inflation is a substitute for a real economy. "For generations of economists, it used to be a truism that 'wealth creation' implies capital formation in terms of generating income-creating tangible assets.To indiscriminately put this label of 'wealth creation' on rising asset prices in the absence of any income creation is plainly a novel usurpation of this concept. It is in essence wealth creation through a stroke of the pen."

"Our general misgivings about 'wealth creation' simply through rising house prices has still another reason, however, and that is the way housing values are calculated. The conventional practice in America is to treat the whole existing housing stock as being worth the last trade. This contrasts wondrously with the tedious process of generating prosperity through saving, investment and production."

"Everybody knows the answer, but few want to admit it: Lured by artificially low interest rates and easily available credit, private households have stampeded as never before into the purchase of homes, boosting their prices. Artificially low interest rates and easily available credit are, actually, the key features that specifically qualify an asset bubble."

Repossessions Up, Sales Down In The UK

The UK is ahead of the US in the housing cycle, so the experiences there may be replayed in other overbought markets. ThisIsLondon reports, "According to statistics from the Department for Constitutional Affairs, banks and building societies applied to the courts for 25,869 repossessions in the first quarter of the year, up more than a third."

"At the same time, Britain's biggest estate agency chain revealed it was selling up to 30 per cent fewer homes than last year and warned the stock market that it made a loss in the first three months of 2005."

"Rising property repossessions normally spell bad news for the property market as the houses and flats are sold at a knockdown price by lenders, dragging down average values."

Dutch Central Banker Concerned

If you have a subscription, FT.com has an editorial worth reading. "British and American policymakers appear to regard the recent period of house price inflation in their countries with equanimity. As long as neither inflation nor unemployment soars suddenly, we are told, the current level of house prices is sustainable and economic growth is not threatened."

"But not all central bankers are so insouciant. Nout Wellink, president of the Dutch central bank, last month warned that a hangover from the property boom could well exacerbate the next downturn. Both the Dutch experience and the history of housing booms suggest that this counsel deserves to be taken seriously. However, it is probably already too late for the leading Anglo-Saxon economies to escape lightly from the consequences of their property bubbles."

Mortgage Applications Down

The weekly mortgage numbers from MBA are out. "The Mortgage Bankers Association today released its Weekly Mortgage Applications Survey for the week ending April 22. On an unadjusted basis, the Index was down 4.2 percent compared with the same week one year earlier."

"With a 9.8 percent increase in applications, refinance activity is at its highest level since March 11, however, refinance applications volume is down 14.6 percent from one year ago."

Upside-Down In One Month?

They may be grasping the situation, however slowly. TheStreet, "The proposition that ever-rising home values will continue to provide broad-based support for the economy sounds more and more dodgy, especially on the same day as the Conference Board's consumer confidence figures fell for a third month in a row."

Here is the question of the day; if new home prices fell 9% in March, does that mean those who bought in February are already underwater?

"More" Problems For Fannie? It's Just Begun

Armando Falcon, the head of OFHEO, which is the regulator of Fannie Mae, was interviewed by the Associated Press and he didn't have good news. "Asked Tuesday whether further discoveries could emerge from OFHEO's investigation, Falcon said, 'We very well might find more problems as we continue to review the company's accounting.'"

Might? Fannie has thousands of "special entities" off balance sheet. The size of the disaster is unprecedented. And Mr. Falcon thinks the OFHEO saved the day. "If the agency hadn't acted to identify and correct problems at Fannie Mae, Falcon said, 'I think they would have eventually manifested themselves in the form of some larger problem that might have created some kind of systemic disruptions' in the housing market."

Time will tell on that one. Mr. Falcon has already turned in his resignation and the replacement of the regulator is almost certain; that doesn't sound like a triumph of enforcement. Without going into the politics being thrown about, both Democrats and Republicans were happy to have the GSE's making easy money available for years and the wrangling now won't put the bubble back in the bottle. At least there is this, "The Justice Department is pursuing a criminal investigation."

"Hot Is Not Correct Term": What Is?

It is interesting to watch the glee turn to confusion as the "experts" realize the sales numbers of the past two days prove them wrong. "'This housing market is so hot that hot is not a correct term for it,' said Joel Naroff at Naroff Economic Advisors."

"The problem is, we are talking about levels that simply are unimaginable, and therein lies the rub. As long as mortgage rates remain low, the housing market will keep on going. However, the pace set in March is likely not to be repeated soon as it was such a huge increase over the previous record. So look for a sharp decline in April," Naroff said.

"'It's certainly not out of the question that the year could turn out to be another record,' said David Seiders, of the National Association of Home Builders.'This is just astounding.'"

"David Lereah said, "My view is there'll be air coming out of a balloon rather than a balloon popping because markets are too healthy right now." Mr. Lereah has said that for sometime; meanwhile the bubble grows.

"'Once I start to see inventories increase in a meaningful way in some areas, then I'll start to see where these balloons might be,' Lereah said. 'Right now I can't find them.'"

RE Speculation Is Global And Connected

The Telegraph reports on a new scam that already may be in a neighborhood near you. "Some suggest that their members can buy new flats for discounts of up to 30 per cent. Supposedly they can negotiate these cheap deals by taking a number of flats in a new development at an early stage, and so get a 'wholesale' price. The members only stump up 5 per cent as a deposit."

"The number of buy-to-let mortgages in the UK has soared from 28,700 in 1998 to 526,200 last year."

It isn't confined to England. "As a last gasp, a number of the off-plan agents are pushing overseas property in places such as Spain and Florida. Gambling on new schemes in faraway markets is the stuff of madness. The room for error is huge."

We are seeing the idea that RE is local completely discredited, as in this MSNBC story. "There's a good chance you or someone you know owns a second home abroad. You may even unwittingly own a stake in a Guangzhou office block, via your pension fund."

This concept is Alan Greenspans' chief arguement against a housing bubble. What else is he wrong about?

Toll Bros. CFO Can't See $4B Inventory

The CFO of Toll Brothers had this comment. "'Housing demand is very strong across most of the country,' said Joel Rassman, CFO for Toll Brothers. Rassman said his company is selling every home it can get local permitting authorities to approve."

"We don't see any significant inventory." Well, what's this?

Blog To Experts: It's A Bubble

New home sales are out and the analysts have it wrong again. "Consumer confidence declined in April for the third consecutive month, signaling Americans' concerns that economic growth is leveling off.The government said sales of new homes shot up 12.2 percent last month to the highest level in history"

"The Commerce Department said new single-family homes were sold at a seasonally adjusted annual rate of 1.43 million units in March, confounding the consensus forecast of a small decline in sales in March. Sales of both new and existing homes have set new records for four straight years, but analysts are expecting demand to cool off a bit."

With a worried consumer and a soft economy, the experts can't understand why sales haven't slowed down. That's because they refuse to see it's a bubble! People act irrationally in a financial mania and that is what we have.

This from MarketWatch, "The median price of a new sold home fell 9.3% month-over-month in March to $212,300." Some discounting going on?

Condo Flipping "Sport" Could Meltdown

Inman News has a story up about buying condo's as a "sport". "A $609,000 'pile of dirt' in Florida that ended up selling as a $740,000 real estate deal. 'It's always a worry when you start talking about one-half million dollars like it's nothing. But we're not talking about a (dot-com) or an Enron or something like that.' Real estate is a tangible thing, he said. 'People need to live some place. They need four walls and a roof.'"

Then there is this Prudential report. "The potential fallout from a meltdown in the condo market is unquestionably one of the biggest risks facing the real estate industry. the effects of a shock would reverberate throughout the industry..it could disrupt the multifamily debt markets."

"Loan delinquencies could increase sharply, and liquidity in the debt markets could dry up very quickly, at least until lenders can assess the impact of falling property values."

Even the Inman piece has some flippers remorse. "'I haven't been in there that long. I don't know where this is going.' People may not realize what's happening 'until we all get burned.It's just like the stock market in the late 1990s. Now, we're all in real estate. Real estate's the new stock market. Which we all know can't last forever.'"

Madness On The Coasts

The Palm Beach Post is reporting that California has nothing on Florida when it comes to a housing bubble. "The median price of existing homes in Palm Beach County rose to $371,500 last month. That's a 37 percent jump from the county's median price of $272,100 in March 2004."

"The median price of an existing home in Martin and St. Lucie counties rose to $235,000 in March.When compared with March 2004, the price soared by 39 percent from $169,100."

The new mindset is apparent. "'Part of it is there's been a turn in how people view mortgages, not necessary that they're not staying in homes but they're not staying in mortgages.' Houses sell so quickly in Palm Beach County that buyers (will) forgo the typical sales contingency that the price be no more than the appraised value, meaning they'll buy the house either way."

"Everything is selling and price doesn't seem to be a factor. There are buyers at every price level."

Not everybody is jumping in. "Sales dipped 7 percent compared with March of last year. Charlene Montford, (is) renting while she looks for a home. So far, Montford says she's been priced out of housing in the area despite a salary that approaches $100,000 a year."

Orange County Graphs

A reader posted this link which has some graphs regarding Newport Beach home sales. The OC report list in the left sidebar allows a quick check of many neighborhoods. Not every zip code in California is up.

Home Price Increase Not Sign Of Econ. Strength

The Mercury News may have todays' report upside-down. "Strong home sales ease inflation fears" was the title. "A surprising rise in home sales restored investors' confidence in the economy and eased fears of inflation and higher interest rates."

Highly valued home prices rise even more and that is less inflationary? And if you listen to this guy, you would think rates are even more likely to be raised due to the increase. Maybe the writer is on loan from the style section. "The benevolent Michele Chandler is filling in for the waggish Jon Ann Steinmetz."

Real Estate A "No Brainer"

This Yahoo site tells us, "Small-biz entrepreneurs are discovering that they can (invest directly in real estate) through their so-called solo 401(k) plans. The tactic has been fueled by real estate's hot returns in recent years."

A good idea? Not according to the CSMonitor. "Richard Thaler has made a career of cataloguing the blunders of amateur investors. Mr. Thaler ticks off the mistakes: People tend to be overconfident in their ability to pick stocks. They're unwilling to admit a mistake and make matters worse by holding on to losers. They put more money in the market as it nears its peak. When a market is rising, they think it will keep rising."

"Don't get us started on real estate. Economists across America warn that housing prices are a bubble about to go splat. But the Univ. of Michigan recently found a growing confidence in the promise of ever-rising property values. According to its consumer survey, 22 percent of households think that real estate is now a great investment, double the share of 15 months earlier."

There is even a tax advantage to borrowing part of the property in the 401k. "'Borrowing speeds your growth using someone else's money,' Anderson says. 'It's a no-brainer.'"

Fed "Attempts Rewrite Of Macroeconomics"

Over at Morgan Stanley, Stephen Roach is taking the Fed to task again. "The Fed is not only hard at work in the engine room in keeping the magic alive, but is has also become the intellectual architect of the New Macro."

"Time and again, since Alan Greenspan rolled out his New Paradigm theory in the late 1990s, senior Federal Reserve policy makers have taken the lead role as proselytizers of a new macro spin that condones the saving, debt, property bubble, and current-account excesses of the Asset Economy."

"Chairman Greenspan has made light of traditional measures of household indebtedness, even going so far as to urge consumers to move from fixed to floating rate obligations. Fed governors have also borrowed a page from the Roaring 1990s in denying the possibility of a housing bubble. Governor Bernanke has also led the charge in coming up with a new theory of national saving, that the United States is actually doing the world a favor by absorbing a so-called glut of global saving."

Mr. Roach is right on the mark again and the article is worth the few minutes it takes to read.

CA Rush To Get Out Bids Up Albuquerque

The California price boom is driving markets in other areas of the country, as this Albuquerque Tribune story relates. "'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."

So much for the localized RE market. Those high prices in LA have another side effect. "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."

Not only are Californians cashing out, but the tax law is enticing them to bid up other "safer", areas. The big increase in sales and prices reported today is critical, because for every seller you have a buyer and now, further to fall.

CA Unsold Inventory Index Doubles

The California Association of Realtors has a report out that contains some surprises. "C.A.R. President Jim Hamilton: 'The inventory of homes for sale has increased compared to a year ago, which has lessened the upward pressure on home prices, but consumers’ perceptions that interest rates will increase continues to drive the market.'"

So while the fear of missing out pushes prices higher, the fundamentals continue to erode. "C.A.R.’s Unsold Inventory Index for existing, single-family detached homes in March 2005 was 2.7 months, compared with 1.3 months (revised) for the same period a year ago."

Unless everybody got a raise, affordability gets lower and lower. "The median price of an existing, single-family detached home in California during March 2005 was $495,400, a 15.7 percent increase over the revised $428,060 median for March 2004, and increased 5.2 percent compared with February’s revised $470,920 median price."

Check out the tables at the bottom of the page, especially the Santa Barbera areas, which showed a 22-38% drop off in sales.

Admitting Bubble "Not An Option"

The DallasNews editorial by Danielle DiMartino has this headline, "High stakes won't allow us to admit housing bubble." Here are some quotes.

"The powers that be insist there's no housing bubble. They have to, mass delinquencies and foreclosures are simply not an option, not with the risks built into the mortgage-finance system. The general concern about these instruments is that they've yet to be 'tested' by an inevitable market downturn. Is there risk in today's lax lending standards?"

"John Vogel (said that) when the government first noted the risks in the savings and loan industry, he remembered, a pencil-to-paper exercise put the risk at about $40 billion. 'We knew we had a problem back when the S&Ls were on the skids in the early '80s. Instead of taking care of it then, we waited until we had a $500 billion problem.'"

"Ten years ago, when the whole securitized mortgage market was $1.6 trillion, Fannie and Freddie held about $76 billion on their balance sheets, or less than 5 percent. Today, Fannie and Freddie either own or back about $3.5 trillion of a $5.5 trillion market."

"Eating away at these protections are no-income verifications, piggyback loans made only to skirt the mortgage insurance requirement, builders paying closing costs so buyers cross the threshold owing more than the house is worth, and lenders doing everything they can to avoid foreclosing."

Speculators Buy 25% Of New Phoenix Homes

BusinessWire is reporting an uptick in foreclosures in the Phoenix area. "Foreclosures.com reported today that new Notices of Trustee Sales in Maricopa County increased slightly to 1020 filings in March, up from 925 in February. 200 homes were actually sold at Trustee Sale Auction in March."

Not huge news, but one interesting sidenote. "With 25% or more of new homes being sold to out of state investors who never intend to occupy the properties, the market is slightly distorted on the upside." Everyone in Arizona knows what state most of these "investors" are from. I wonder if they are using home equity loans to do so?

Survey Of Affluent Finds Unease

This survey by CNN is finding more folks believe there is trouble in bubble-land. "The survey found that 60 percent of those surveyed now believe a bubble exists in real estate prices, the highest reading since the survey started in January 2003."

Bubble-Palooza Coming To LA

The LA Times is reporting on a "real estate expo less like a hard-nosed business event than a Gen-X and boomer-friendly rave."

"'It's a mega-event,' added Bill Zanker, president of the Learning Annex. 'L.A. is responding like wild. Everybody in L.A. is talking about real estate. It's the new aphrodisiac..the new type of rock concert.'"

"The New York-based company (is) famous for its workshops and classes such as cardio striptease and tarot card reading."

If you listen to what they are calling the "classes", it's safe to say attendees can leave the calculator at home. "The Lazy Way to Create Real Estate Wealth, How to 'Quick Turn' Real Estate in Los Angeles With No Money, Credit or Risk, and How to Get Free Money From the Government for Real Estate."

Rental Vacancies Over 10%

The top housing news item out this morning is the existing homes sales report. But also out is the first quarter of 2005 Census Bureau report which has a ton of numbers. Rental vacancies stand near all-time highs at 10.1%.

If you look at how they derive that number, you'll find a lot of houses aren't counted. Of 5.915 million "held off market" houses, 1.974 million are for "occasional use", 1.247 million are "temporarily occupied by persons with usual residence elsewhere" and 2.694 million are empty for "other reasons".

Of the 15.5 million total empty houses, about 12 million are vacant year round and 3.5 million seasonally vacant. With an estimated total of 123 million homes nationwide, that means 12.6% of houses are vacant. For every two rented units, there is an empty home, for whatever reason. The numbers vary by region but still, that's a lot of dark windows.

You Are So Beautiful. Can I Buy Your House?

The CS Monitor reports that buyers are getting chummy with sellers to snag a house. "In some neighborhoods of Los Angeles where, in addition to offering as much as $75,000 over the asking price, buyers are sending flowery bios, pictures, and letters to sellers."

"'I just oohed and ahhed my way from room to room,' read one letter to Jane Centofante, who was selling her 2,000 square-foot home in Westwood, a tony L.A. suburb, for a cool $1.49 million. 'I gather from your [house] that you are warm and smart and bring incredibly beautiful detail to your world.'"

"'They've had to kiss a lot of frogs before they find their prince,' says Ms. Jacobson, a native New Yorker. 'But those other frogs will find their palaces, too. There are still plenty of opportunities.'"

Despite the overconfidence, sellers do appear to be nervous. "Unfortunately, Jane Centofante has yet to sell her home in Los Angeles. An inspector found traces of potentially toxic chemicals. Since the finding, she has lost four potential buyers."

"'I'm ready to sell. And I want to sell. But now I can't,' says Centofante, who hopes to have the creosote problem remedied before the market sours."

S&L Bust Revisited

The writer of this editorial reviews the last major housing bust. "One such calamity struck the USA in 1986-1989. The S&L's were rendered unable to further support the price of real estate by rolling over old credits, refinancing residential equity, and underwriting development projects. Endemic corruption and mismanagement exacerbated the ruin. The bubble burst."

"Hundreds of thousands of depositors scrambled to withdraw their funds and hundreds of savings and loans association (out of a total of more than 3,000) became insolvent instantly."

"As institutions closed their gates, one by one, they left in their wake major financial upheavals, wrecked businesses and homeowners, and devastated communities. At one point, the contagion threatened the stability of the entire banking system."

Although I can't agree with his conclusions, he does see an indifference that this blog points out. "It is instructive to study the decisive reaction of the administration and Congress alike. They tackled both the ensuing liquidity crunch and the structural flaws exposed by the crisis with tenacity and skill. Compare this to the lackluster and hesitant tentativeness of the current lot."

A Couple Of Charts

The chart on this web site showing debt to GDP is interesting as is this one that shows the price climb in the West.

Will Lawsuits Bring Fannie Mae Down?

Problems keep piling up for mortgage bank Doral Financial. "A shareholder class action lawsuit by request and on behalf of purchasers of Doral Financial Corp. securities was being filed today." If you look at the charges, isn't that exactly what Fannie Mae did a thousand times larger?

"It is alleged that during the restatement period Doral falsely reported its results ..thereby overstating its net income and revenue and understating the Company's net liabilities in violation U.S. GAAP. The Complaint alleges that this enabled certain insiders to reap more than $10,000,000 dollars in insider trading profits, as well as cash incentive bonuses." How many executives at the GSE's have been fired for the same thing?

"Rather than come clean and disclose that they had been misleading investors, it is alleged that Doral attempted to further this allegedly false story." Add the cherry-picked mortgages and off-shore "entities" to the derivative puzzle and it may be that lawsuits finish off Fannie, not congress.

Governments Dumbfounded By Home Prices

The housing dilemma has central planners fumbling for answers, especially in California. Could it not be argued that making loans easily available has fueled home prices, making housing less affordable? As the ContraCosta piece says, "Welcome to the strange world of housing policy."

"Federal housing policy..is much more generous to middle and upper-class home owners than to low-income renters (and) is a long-standing approach with wide support from both major parties. In California, the state's official bank for lending for affordable housing can't find takers for all the money it has to lend to first-time home buyers." That says a lot.

"By overstating the potential benefits of homeownership, today's policy makers risk diverting resources away from more effective means of addressing many of the most critical problems that confront low-income and low-wealth households," said William Apgar.

John Perkins of the Home Builders Association of Northern California, predictably wants the government to butt out, or does he? "Such efforts have 'been well-intentioned but (with results) very different than those who created the policy envisioned.' Government should 'get out of the way of the enterprises that create housing, that is, the region's home builders. The members of my association would like nothing more than to produce housing for the most needful people in the market. The government needs to find a way that makes economic sense.'"

More of this, Mr. Perkins? "Since 1996, developers have exercised program options that allowed them to convert 16,300 of the state's subsidized apartment units into market-rate units, and as many as 73,200 more could be converted."

Here's a solution. Require 20% down and housing will be affordable in 6 months.

It's All One Bubble

It must be gratifying to readers of this blog to see themes discussed here picked up by the mainstream media. This Mcall.com story considers that financial bubbles have shown up everywhere and that the root problem is massive credit creation.

"It might be reasonable to suppose that they aren't individual bubbles but rather one mega-bubble, the totality of the economic and financial world we live in."

"Some Wall Street veterans say the global bond and mortgage markets may constitute the scariest bubble of all, as investors and lenders have fallen over themselves to extend credit to companies and individuals at generously low rates of interest."

"But true bubbles on the scale of dot-coms in the late 1990s, or Japanese stocks in 1988-89, or tulip bulbs in 1636-40, are relative rarities." When we look back on this era, if the various bubbles may be viewed as one, doesn't that address the "rarity" issue?

"Jeremy Grantham believes the blue-chip Standard & Poor's 500 stock index should fall to about 730 to be 'fairly valued.' That would be a drop of about 35 percent." And what would be the value of the Nasdaq, which taken as a whole has negative earnings?

"Grantham said: The Federal Reserve, by cutting interest rates to generational lows in recent years, inflated a new crop of financial market bubbles by giving investors the wherewithal to aggressively bid up the values of bonds, real estate and (once again) stocks, he said. That's what easy money will do, and that's what it did."

Baby Boomers Are The El Nino Of Housing Bubble

Remember when everything was blamed on the weather phenomenon El Nino? The population bulge known as the Baby Boom is referred to in just about every story which tries to explain away the price explosion in homes.

"Baby boomers are coming into their own with money, and real estate is more of a sense of security."

When sales slow down, again, it's the boomers. "As the baby boomers are getting older they are downsizing, potentially. They don't need to buy as many home furnishings and they may even be pushing some of their furnishings off on their children, who may not go out and buy."

Access Suggestions And Firefox Fix

I have received a lot of email about not being able to access this blog. I thought I would post some reader comments that may help. Thanks to the posters.

"You've gotta clean your cache out too. Not just cookies. That solved the problem for me, and it's what the blogger guys recommend."

"Firefox users, try using this URL:

http://thehousingbubble.blogspot.com/index.html

I was having problems with the bare .com address too. After adding "index.html" to the URL my problems ceased."

And You Thought You Were Sitting On Equity

No one can question that some people are making a lot of money from the housing boom, in fact let's look at the real winners. This Forbes table lists some big paychecks for the CEO's of major corporations. I'll skip Wells Fargo, Capital One and the other banks, they make that much every year.

Angelo Mozilo of Countrywide Financial, No. 9 at almost $57 million.
His firm is leading the nation in subprime lending and pushing the envelope on all those interest only, negative amortization loans. And it's not even a bank!

Robert "I raise prices every week" Toll of Toll Brothers, No. 13 at $50 million.
And that's on top of hundreds of millions in stock sales, right before the firms' stock started falling.

Bruce Karatz of KB Homes, No. 20 at $38 million.
I didn't know swinging a hammer made you so much dough.

Larry Mizel of MDC Holdings, No. 28 at $34 million.
A subsidiary does a little lending too, just to wet the beak.

Edward Linde of Boston Properties, No. 48 at $24 milion.
He runs a REIT, and we'll get some news out of that industry this coming week.

I probably missed some, but you get the idea. When we look back, it'll be nice to see where all that money went.

US Housing Key To Global Growth: Economist

The Economist looks to explain why financial markets have the "jitters". The US housing situation is seen as critical, if not discussed at length. "A weaker housing market could complete the consumer's undoing: prices have climbed by 65% across the nation since 1997 and by much more in some areas, and the boom has helped to fuel an increase in household debt and consumption."

Did you know we've got the whole world on our shoulders? "The stockmarket's fear that the American consumer, on whose shoulders the world's economic growth now rests, is buckling as interest rates and oil prices rise."

Home Prices Threaten Local Economy

For LA the picture is getting clearer even if you have to go to the bottom of the article to find it. "One problem that’s exacerbated for Los Angeles and other Western states with strong housing markets is the rising disparity between personal income growth and housing prices, a key indicator of a bubble."

"In California, personal income rose 2.7 percent last year, while housing prices were up 23.4 percent. 'In the long-term, personal incomes rise at about the same rate as housing prices, so we’re obviously seeing bubble activity,' said Dawn McLaren, an economist at Arizona State University."

The Modbee tells us that the spread inland isn't making everybody happy. "Fontana Mayor Mark Nuaimi, who moved to the city a decade ago and commutes 43 miles each way to Anaheim. "The regional freeways are death,' he said."

"Joe Minasso sold his house in Victorville when his 50-mile drive west to Ontario grew from 40 minutes to two hours. His new home in Fontana will save him time but add about $125,000 to his mortgage. 'The drive for me is worth the extra money to pay for the house,' he said."

"'There are a lot of different things that can derail the U.S. economy, but what we know for sure is that there will be a recession,' said Joseph Magaddino, at Cal State Long Beach. 'We just don’t know when.'"

Air Will Come Out Of Housing "Balloon"

The housing boom poster boy isn't so certain these days, even when preaching to the choir. "'The air will come out of the balloon, but it will not burst,'" David Lereah, chief economist for the National Association of Realtors said.

"Lereah balanced his bullishness with a few warnings about worrisome national and international trends that could cause mortgage interest rates to rise above 8.5 percent, his "yellow flag" level. Those trends included an intractable federal budget deficit, a rise in inflation, a weakening U.S. dollar and proposed reforms to federal taxes, Social Security and Fannie Mae and Freddie Mac."

Creating private Social Security accounts could result in a "massive transfer of wealth" from the bond market, which supports mortgages, to stocks, he said. Tax reformers have talked about eliminating the deductibility of property taxes."

Price Boom Making For Bad Decisions

The emotions swirling around the housing market are strong and result in distorted decision making. Take this AZCentral piece. "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.'"

It's not just buyers that have lost their heads. "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."

Listen to the same guy, "People spend 45 to 50 percent of their earnings on housing. This is very dangerous, because it doesn't provide a financial cushion. Lutz agrees. '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."

Who Needs Experts, Read A Blog!

It's funny to see "experts" kick around theories on the housing bubble that this blog and it's readers have addressed for months. Reuters, "Mark Zandi, chief economist for Economy.com, said it won't be buyers who will disappear. Instead, he believes disgruntled sellers will bring the market to a halt." Heard it.

"People will start pulling their homes off the market if they think they can't sell it at a 'fair price,' which is now perceived to be a very high price." They did that in Sydney, Aust. for a few months, and then prices plummetted.

"The first piece of data where you get a sense of that is not home sales. It's mortgage applications. If applications fall, particularly in periods where interest rates rise, a housing freeze is likely to arrive." We've already covered that; apps are falling with rates falling and regular readers will remember apps have been down since 2003.

"Van Davis keeps an eye on inventory, measured in the amount of time it would take to sell the current number of homes available, to gauge the market." This blog has posted on the many reasons sellers are holding back. And speaking of inventory, how about the vacant 10% of rentals? The high percentage held by speculators? We won't split hairs on a Friday. Wouldn't be prudent!

Low Lending Standards Lure First Time Buyers

It may be too little, too late, but CNNMoney wonders if the easy money loans weren't the best move. "Among first-time home buyers in 2004, according to the NAR, the median down payment was 3 percent, half what it was in 2003." First time buyers, getting in at the top, with a 3% cushion; oh boy.

"What is new today is that lenders are allowing for the layering of risks on top of one another. What we don't know is what if we put all these risks together and put them in a rising interest rate environment, a declining housing market, or a weakening economy."

"The shift in lending standards started after the dot-com stock bust in 2000. By 2003, with the refinancing boom coming to a head, banks quickly set about trying to recruit more first-time home buyers, encourage second-home buying and promote home equity lines of credit as an easy and responsible way to fix up the house or finance a vacation."

"The amount Americans owed on home equity lines of credit jumped to about $491 billion at the end of 2004, up 42 percent from a year earlier, and more than triple the amount at the end of 2000." Responsible? Actually, the re-fi boom fizzled after 2003 and lenders fell upon less sound borrowers to keep profits up.

"Complacency Would Be Ill-Advised

Federal Reserve Board Gov. Donald Kohn had some bad news for the housing bulls today. "We should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices, just as we were willing to keep rates unusually low as house prices rose rapidly."

Mr. Kohn isn't sure if there is a housing bubble, but this is what he predicts if there is. "If current expectations are badly distorted, then the way forward may not be so smooth. Eventually, reality always asserts itself over wishful thinking, and such realignments are sometimes abrupt, as illustrated by the collapse of the high-tech bubble a few years ago. In such circumstances, asset prices can adjust sharply."

"We have little experience to call on in judging when and how they will be corrected. We cannot rule out sudden shifts in expectations, whether or not they are unreasonable to begin with, and asset prices may change suddenly. Investors may recognize the unsustainability of some flows and prices, but believe they can adjust in advance of the market, as apparently many thought they could in the tech-stock bubble, and their reactions when prices move could add to volatility."

The risk "spread" represents a complacent market, Kohn said. "Although premiums on private bonds relative to Treasury yields have risen somewhat of late, they are still at the low end of their historical range, suggesting that investors are sanguine about default risk and other types of uncertainty."

Everyone should know by now, that there may be a bubble. "Given the widespread press coverage of this issue, from my expectation that people should now be aware of the risks in the real estate market. Complacency would be ill-advised."

Jim Rogers On The Housing Bubble

Famed investor and writer Jim Rogers took some time for a few questions from The Housing Bubble blog this morning.

Q: What are your general thoughts on the concept of a housing bubble?

JR: We are in one in much of the US and in some other countries partly because interest rates were driven too low and too much money has been printed.

Q: As someone who is familiar with international trends, have you observed home price imbalances in overseas cities?

JR: Yes.

Q: Fannie Mae and Freddie Mac are at the center of a storm right now. Do you think the firms pose a risk to the financial system?

Yes. I am short FNM.

Q: There are a great deal of mortgage backed securities out there. Do you see any problems for the values of the MBS's or for the holders?

JR: Serious problems for both.


Q: How do you see commodities reacting as housing prices ease or even decline?

JR: The commodity bull market has another 9-18 years to run. There will be consolidations along the way as there always are and have been in every bull market in history.

Thank you Mr. Rogers!

Lumber Futures Retreat

Check out this link for a chart of lumber prices.

Looking Back On The London Crash

This NZCity link explores the experience of homeowners in London after the last boom. "Homeowners were walking into banks and tossing the keys to the home on the bank manager's desk, saying: 'It's all yours now.' And then they learned one of the brutal facts about home ownership; you cannot hand your house back to the bank and walk away from your mortgage."

"The banks took the keys, sold the house and then sued the owners for the difference between the selling price and the mortgage debt."

In telling the tale, it seems like the writer works for the LA Times. "Income growth was strong. Borrowers were able to obtain higher loans relative to housing values. Demographic trends were favourable with stronger population growth in the key house buying age group. The supply of houses grew more slowly. Interest rates fell. The very experience of housing appreciation reinforced expectations of further gains and the market had become a classic speculative bubble. The house price to income ratio, which stood at the second highest peak in the post-war period."

Then it all unwound. "The bust was the result of the reversal of most of these factors. Interest rates rose. Income growth and growth expectations weakened. Demographic trends reversed. Mortgage lenders tightened up their lending criteria. Not even the major falls in nominal interest rates were sufficient to revive UK house prices. UK housing remained very bad for very long. When property crashes, it is far more painful than a share market crash."

"Gradual Easing, Not A Decline"

Those who believe the home price boom is normal have a common argument. Stop thinking about it. "Now: Don't worry. Tomorrow: Don't worry. Next year: Don't worry."

The Citizen Times story makes one wonder, what makes a person an "economist"? "There might be a recession around the end of the decade, Smith said. 'This is 2005. Why should I worry about something that's going to happen five years from now?'" Does this guy have a mortgage?

He has a message for Washington. "'There is no statistically significant correlation between the federal budget deficit and anything,' Smith said. 'It has nothing to do with economic growth. It's just there.'"

"'He predicted a gradual easing of the rate of growth in home prices nationwide, not a decline. 'This is not a national housing bubble.'"

The Bubble And The Quality Of Life

Somebody woke up to the negative aspects of the housing bubble and did a poll on the subject. They were surprised at the outcome. "Nearly half (48 percent) of those surveyed who don't own a home said the cost of housing has made them consider moving somewhere else, while 27 percent of homeowners said they've considered moving elsewhere."

This statement shows the issue hasn't dawned on the quality of life "experts" before. "The question of whether people had considered moving because of housing costs was not asked in three previous versions of CSUS's Annual Survey of Public Opinion and Life Quality in the Sacramento Region."

"Credit Events", Home "ATM" Worry Wall Street

A reader recommended this video interview between Kim Parlee of Market Wrap and Tim Mulholland, executive director, Melamed & Associates. The second half gets into "credit events" and overstretched borrowers. It's the 4:20 PM clip, about 4 minutes long.

Home Builder Stock Volatility: Mark Of A Turn

To be fair, the home builders' stocks shot up today in spite of a big jump in the 10 year bond. As Robert Prechter said, volatility is to be expected at lows and peaks and the larger the trend, the more volatile the trading. The stocks have had a long, steady run up. It's choppy now, as bulls and bears wage the psychological battle.

Sorry about the server problems today. I appreciate your patience!

Record Number Of Homes For Sale In Houston

Real Estate is up in Houston. "All listing categories combined, Houston's overall housing market in March experienced increases across-the-board including sales, available inventory, pending sales and overall total dollar volume on a year-over-year basis."

Things are going gangbusters for sure, but, what's this? "The number of available homes at the end of March was 43,152 properties, which was an increase of 8.8 percent versus last March and a new monthly record."

If more homes are selling, why is there a record number on the market. That's a lot of inventory so who is rushing to market? Maybe some Houston area readers can help us out.

Debt, Speculators, Will Crush Bubble: Analyst

Gary Gordon is the chief investment strategist for UBS Investment Research and he sees the US debt levels stopping the housing bubble in it's tracks. " As borrowing slows, so will spending, and as spending drops, corporations that make the goods will cut back on hiring."

"Gordon believes the 'off-the-charts fantastic housing market' the nation as a whole has enjoyed soon will come to an end. Rising interest rates will put the brakes on home-buying, and then the 'huge number of homes in the U.S.' that are owned by speculators are likely to come suddenly onto the market. Home prices will begin to flatten, lenders will tighten their credit standards and the air will begin to come out of the housing market, he predicted. How soon will it all occur?"

"I’d be very surprised if it doesn’t start within the next six to 12 months."

Borrowers are already pulling back. "MBNA said in addition to the charge, its results were affected by 'unexpectedly high payment volumes' from U.S. credit card customers. The higher payments reduced managed loans in the quarter more than in prior years, the company said."

Congress Won't Reform GSE's

Leave it to the Congressional Budget Office to tell congress the short route to fix the GSE's is to eliminate the subsidy. "CBO Director Douglas Holtz-Eakin, said the housing market no longer needs the parts of U.S. law governing Fannie and Freddie that Wall Street interprets as a federal guarantee of the companies' obligations."

"Therefore, those entities could gradually be relieved of the responsibilities and benefits of their current status as GSE's and required to operate as fully private organizations, which would reduce their risks and costs to the federal government."

Sounds perfectly reasonable to me. But hear the horror from the so-called reformers. "'I'm not pushing for the total privatization of the GSEs,' said Alabama Republican Sen. Richard Shelby, chairman of the Senate Banking Committee. 'The GSEs play a critical role in the housing market.'"

OK, Mr. Shelby, I have a long memory and when this thing goes sideways, you will be reminded that the US could have escaped billions, maybe trillions in liability.

Can The Crisis Be Minimized?

A reader sent this Copenhagen Post story regarding two professors who think more can be done about the bubble than holding "who spilt the milk" hearings. "The two, legal experts specialising in the real estate market, see the situation as so critical they warn that the state should start to consider the establishment of a government financed organisation designed to help bail out homeowners when the market fails."

"It seems that lenders have been able to turn a significant portion of customers into life-long debtors, for example with interest only mortgages. The development has also created a niche for private speculators, that is to say, individuals who are buying property for resale, rather than as a place to live."

Many readers have said the government will only screw-up this mess further and they should not bail out the market. That's probably true and I would add the problem in the US is too large. But these gentlemen are right to say the government should do something, even if its just to try and "talk down" prices.

Email Added

In response to several requests I have added an email address in the profile section. I prefer readers with links to post them in the comments section. That is because I check comments much more often than email and it gives other readers the link. But if anyone wants to contact me, please do so.

Uncle Sam, The Robber Baron

In Prescott, Arizona yesterday I was told there are buyers, just no sellers. But nobody could suggest there is no land available in that valley. This blog has pointed to several reasons for a lack of sellers; taxes, high replacement costs, etc. This SunSentinel report is making that assumption, and then concludes that is why building is down.

"'Regardless of how good market fundamentals are, we're running out of land,' said David Dabby, in Coral Gables. "With the kind of land restraints we have, it's no wonder single-family starts are down.'"

Think about this editorial when you hear government types say the only solution is to make loans easier to obtain. "The federal government owns somewhere between 600 and 700 million acres of land, or about 30 percent of all U.S. land. No one knows for certain."

Remember the homesteading days, when the government gave land away? Now, its sits on huge chunks of the country, driving up prices and freely loaning to the citizens to buy in at these prices.

Another Second Home Tale

This Palm Springs story includes a couple who may have made the ultimate mistake in the housing bubble. "Retiree Fred Crutcher, 68, and wife, Patricia, have had frustrating experiences as both buyers and sellers."

"While they're very happy with their new home in northern Palm Springs, they're still trying to sell their former home, a large two-level condo in southern Palm Springs."

"The couple listed the at $589,000, but have since reduced the price twice, it is now listed at $580,000. 'It's really hard to tell why it hasn't sold so far,' said Crutcher. In the meantime, the couple is now having to pay two mortgages, not to mention homeowners' association fees in two places."

The future of housing may depend on how many families are in a similar situation.

Building Our Way Out Of The Bubble Won't Work

Often when the subject of affordable housing comes up, the knee-jerk reaction is "build more houses". In this Voice of San Diego piece, a veteran of the housing scene discusses why that's not working.

"The developers have learned a new trick after the last local real estate price bubble popped in 1989. It's called controlling the 'absorption rate.' It goes like this: A builder gets the land and zoning approvals to build new housing subdivisions, but only builds in small numbers of new homes. That is done for two reasons. One is to make sure that housing prices remain high by limiting the supply of new homes, and the other is to ensure that they can sell all the homes in each partial release of homes before they invest in the next."

"The San Diego Building Industry Association has done a very slick public relations job of linking the problem of a lack of affordable housing and regulatory restraints on unlimited homebuilding in the public's mind. The argument is that we could build a lot more homes if the regulations didn't get in the way."

"The truth is that builder actions to limit the number of homes they release into the market at any one time is a key factor driving up home prices, along with all the young speculators who are getting in with nothing down. Many of the speculators are going to go bust when the price bubble bursts, but the builders will continue to profit as much as they can."

"Do We Really Need A Second Home"

Julie Brosterman who writes for Inman News always has her own take on things, like the time she reported that the Social Security changes would boost RE. Now she's back with a story that only could come out of California; impulse buying for a second home.

"During dinner on Friday night, the conversation was all about real estate prices in Palm Springs and the latest projects that our friends had made offers on. I clung to every word and by Saturday morning I had agreed that rather than go shopping in the fabulous vintage shops, I'd tag along with them to look at some of the 'opens.'"

"We realized that the market there is even more insane than in Los Angeles. Some of the houses are clearly "flips" and others look like they're made from cardboard."

"We debated. We mulled it over. And by Sunday, we were almost depressed by the thought that we might have 'missed the boat' out there and that $600K is the new $400K and after all, 'do we really need a second home?'

So they held off, and went back to the paradise that is LA. "Los Angeles is not a place where residents 'go away for the weekend' and when they do, the traffic and time it takes to leave town usually leaves everyone thinking that it's just not worth it."

"When I first moved here in 1983, I couldn't believe how many native Californians I met who had never been out of the state." That explains a lot.

Without Government Backing, No One Will Loan?

In congressional testimony the head of Fannie Mae said that without the GSE's bundling of mortgage backed securities, and the "implied" US government backing, the Chinese and other major buyers would likely halt purchases.

"'Fannie Mae "has drawn in billions of dollars from investors abroad to expand the availability and lower the cost of housing for low- and moderate-income Americans,' Mudd said. 'It is not at all clear that those foreign investors would place their money in the U.S. housing market without the predictability and convenience provided by' debt issued by Fannie Mae and smaller rival Freddie Mac."

After months of posturing, we may finally be getting down to brass tacks, which could be why the markets are in trouble.

This line causes one to question who is in charge. "The two companies have for years fended off congressional attempts to crimp their privileges or rein in their operations." It is more probable that congress didn't try too hard as the members enjoyed the easy money.

Home Builder Stocks Tank

After a nervous rally yesterday, Wall Street is throwing in the towel on the home builders after the starts decline. Down numbers again. Toll Bros. 4.2%, KB Home 3.95%, Ryland 3%, Pulte 3.9%, Lennar 2%.

Ryland: The Top Is In

The home builder Ryland Group confirmed the peak is in with revenue and net income guidance for 2005 that is below consensus. "Ryland is saying it anticipates per-share earnings will exceed $7.50. The company had previously expected earnings of more than $7.25 a share."

The consensus number was $7.65 and the market was quick to sell off. It is the first time in many months that a large homebuilder has not out-performed.