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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.

Some housing bubble news from Wall Street and Washington. Bloomberg, “Home prices declined in 21 U.S. cities in January, led by Sacramento and Las Vegas, as banks sold foreclosed homes at bargain prices. The price per square foot in Sacramento dropped 28 percent to $166 from a year earlier, according Radar Logic Inc. Las Vegas fell 25 percent to $137 a square foot. San Diego was the third-worst U.S. market, with prices dropping 21 percent, and Los Angeles was fourth, with a 17 percent decline.”

“‘Like homebuilders who feel pressure to get rid of inventory quickly, many banks and lenders experience the same pressure when dealing with homes from foreclosure,’ and decide to sell at below-market prices, the report said.”

The Kansas City Star. “NovaStar Financial Inc. disclosed that more than half a dozen regulators and law enforcement authorities, including the FBI, have requested information from the subprime mortgage lender.”

“The decline in housing prices has clobbered NovaStar, which specialized in making mortgage loans to borrowers with shaky credit histories. Soaring delinquencies, defaults and foreclosures led to a staggering loss for the company last year of $733.1 million.”

“In its filing, the company repeated its earlier declaration that there were ’substantial doubts’ it could continue as a going concern and that it may be forced to declare bankruptcy.”

From Spiegel Online. “Germany’s second biggest state-owned bank, Bayerische Landesbank, revealed Thursday that the global credit crunch (more…) has cost the bank €4.3 billion ($6.7 billion) — far more than it had previouly predicted and more than any German state-owned bank has suffered so far.”

“During a presentation of the bank’s results Thursday, the company said that €24 billion of its assets were at risk of devaluation. On Wednesday, Germany’s third biggest state-owned bank, WestLB, reported it had lost €1.6 billion (more…) in 2007 after the credit crunch cost it over €2 billion last year.”

“‘What the real fallout will be, nobody knows right now,’ said Michael Kemmer, BayernLB’s CEO.”

From Reuters. “British house prices fell for the fifth month running in March, according to data from the Nationwide Building Society, as lenders pulled cheap loans, rushing to cut their exposure as they themselves struggle to obtain reliable financing.”

“Britain’s house prices have tripled in the past 10 years and, at about 174,000 pounds each, cost more than seven times the average annual salary.”

“‘Most of the recent news has been concerning,’ said Ed Stansfield of consultancy Capital Economics in London. ‘It’s looking as if the chances that we follow the United States in terms of scale of (house price) falls are rising all the time.’”

“The truth is that most British homeowners couldn’t afford their houses if they didn’t already own them. Take a buyer on an average salary of about 23,000 pounds buying an average house for about 174,000. Even if by some stroke of luck the buyer had managed to save 35,000 pounds for a deposit, finding a lender who would lend them six times their salary today is all but impossible.”

“This is beginning to dawn on many, to judge by a recent survey of British consumer morale, which showed it had fallen to its lowest level in more than 15 years in March.”

“The UK has been heavily dependent on consumer spending that is housing related in one way or another; either due to investment in housing or based on spending predicated on house price gains past and future.”

“Spain’s fast-crumbling property sector, the driver of stellar growth for a decade, still has a long way to fall and will condemn the economy to years in the doldrums, economists believe.”

“Last week official figures showed January home sales slumped 27 percent year-on-year and anecdotal evidence suggests the situation is far worse. Juanra Doral, director of operations at one of Spain’s biggest property websites, said sales on its site have more than halved year-on-year.”

“‘We are witnessing an almost complete halt. Nobody expected it to be so severe,’ he said, adding that it now took over 11 months to sell a house compared with three this time last year.”

“‘When it comes to the imbalances within the economy, Spain is like the U.S. on speed,’ said Diana Choyleva, a senior economist at Lombard Street Research in London.”

“Home starts will halve to 300,000 this year, the Madrid Association of Property Developers (ASPRIMA) said last week. The group had estimated 400,000 building starts but its chairman told journalists the estimate had become obsolete in the time it took to publish the report.”

“With hundreds of thousands of properties standing empty, prices are likely to fall 8 percent this year after tripling in the last decade, ASPRIMA has said.”

“‘Forget about Spain,’ Lombard’s Choyleva tells real estate clients asking her whether to invest in the country. ‘It’s going to be a long time before this economy returns to anywhere near the growth rates it enjoyed over the last 10 years.’”

“A plunge in consumer confidence and services sector activity shows the collapse in the property market is fast infecting the wider Spanish economy. ‘In Spain it seems to be an all-round malaise,’ said NTC chief economist Chris Williamson. ‘It was a dreadful survey.’”

“Not only that, consumer confidence fell in March to 73.1 from 76.8 in February, the Official Credit Institute said on Thursday, close to January’s all-time low of 70.9, and well below the 100 mark which separates pessimism from optimism.”

“‘Spain is a real disaster,’ said Marco Valli at Unicredit MIB. ‘The housing downturn is spilling over very quickly to all other sectors, helped by the surge in inflation that dampens purchasing power at a time in which consumer confidence drops due to the weakening labour market and economic outlook.’”

“The first hint of an end to the Spain’s decade-long property boom, which saw house prices triple, came only around the middle of last year when property websites reported prices began to dip.”

“At the time, economists and officials scoffed at any suggestion of an end to exponential growth in property. But the U.S. subprime crisis and ensuing credit crunch in the second half of last year taught Spaniards the dangers of allowing household debt to reach 130 percent of annual income.”

“The cause of the mess was cheap credit thanks to Spain’s membership of the euro zone, long hailed here as an unalloyed blessing.”

From Stuff.co.nz in New Zealand. “House prices are overvalued by about 30 percent, according to BNZ economists who warn against increasing the supply of houses when the market is diving. ‘We believe house prices risk falling by more than the 10 percent we already presume for this year,’ BNZ said in a report.”

“Between 2003 and 2007 there was roughly one new dwelling built for every two additions to the population. This build-rate has been higher at times in New Zealand’s past but it was not low.”

“A correction in the housing market is inevitable. It will be painful for many people but it will be good for the economy. ‘Well, it’s here. And the potential downside bears thinking about - as our indications of a 30 percent housing overvaluation attest to.’”

“‘But let’s also bear in mind the good news, in that many potential home owners, long squeezed out of the market, stand to be big benefactors,’ BNZ said.”

The JoongAng Daily from Korea. “In a switch, the price of apartments in the Songpa District of the trendy southern Seoul area are falling as thousands of new apartments near completion.”

“‘There is a large number of new apartments and there are units for sale for 20 million ($20,470) to 30 million won less than the current market price,’ said Lee Mun-hyeong, a realtor in Jamsil-dong, Songpa District.”

“According to real estate industry experts, there will be 18,105 new apartments available between July and September in the Songpa redevelopment area. That number represents 23 percent of the 78,524 apartments now in the district and is double the average annual new housing supply in southern Seoul since 2000.”

“Apartment prices in Songpa have fallen 0.3 percent on average this year. As the trend continues, more owners are considering selling.”

“‘Apartments purchased for investment purposes are on the market and the prices have declined by 50 million won this year,’ said Lee Sang-woo, another realtor in Jamsil.”

The Calgary Herald from Canada. “Alberta’s resale housing market is cooling in the same manner as Calgary’s with sales dropping and new listings rising dramatically in February, according to the Canadian Real Estate Association.”

“The association’s latest MLS data show unit sales for residential properties (single-family homes and condos) in the province decreased by 30.3 per cent compared with a year ago in February (6,602 to 4,601) while new listings increased by 44.9 per cent (from 7,800 to 11,302).”

“New listings were at the second-highest level ever for the province.”

“‘Now that price growth has come to a grinding halt, speculators are looking to get out of the marketplace,’ said Richard Corriveau, regional economist for Canada Mortgage and Housing Corp. ‘So people who had purchased in previous months are attempting to now get out of the market because there’s no incentive to wait for future price gains in the near term.’”

“The drop in Alberta sales, said Corriveau, is due to a sharp decline in net migration and ‘a response from prospective buyers on the rapid price escalation from previous years.’”

The Calgary Sun. “Calgary homeowners Darren and Colleen Long are feeling the impact of the city’s saturated housing market. The couple has had their family’s Douglasdale Estates home on the market for six months with plenty of showings, but no offers.”

“‘You need to compete,’ Colleen said of the large number of homes for sale. ‘There are four, five or six (homes for sale) on the same street.’”

“In Calgary, the average sale price for a single-family home in February was $471,696, well up from the $448,557 in 2007.”

The Vancouver Sun. “Greater Vancouver closed March with its slowest first-quarter for sales since 2001, Canada Mortgage and Housing Corp. analyst Robyn Adamache said Wednesday.”

“In Greater Vancouver, realtors saw 2,997 sales through the MLS in March, compared with 3,582 in March 2007. New listings added to the market in March were up four per cent to 5,674 compared with the same month a year ago.”

“Prices, however, remain elevated with the benchmark price of a so-called typical single-family home hitting $764,616 in March, 12 per cent more than March 2007.”

“In the Fraser Valley, property inventories hit a 10-year high in March, the Fraser Valley Real Estate Board reported, with total active listings up 27 per cent to 9,361 units compared with a year ago, although new listings in March were down from the same month a year ago. MLS sales in the Fraser Valley of 1,315 units represented a 25-per-cent decline from the same month a year ago.”

“Tsur Somerville, director of the centre for urban economics and real estate at the Sauder School of Business at the University of B.C., added that his sense is that the market psychology has shifted from ‘unmitigated optimism’ to caution, given what has happened in the U.S.”

“‘People are cognizant of risks to real estate in a way that, two years ago, they weren’t entertaining,’ Somerville added.”

The Winnipeg Free Press. “Bargain-savvy Manitobans are creating their own little desert storm, snapping up vacation homes in the Phoenix area as Arizona builders scramble to unload properties for as little as half the usual price.”

“Tom and Angela Lamboo of Winnipeg paid $117,500 for a brand new, 1,327-square-foot bungalow that includes three bedrooms, two bathrooms, a two-car garage, all new appliances, $3,000 worth of window coverings, a fully-landscaped front yard, and a 1.8-metre-high brick fence that runs all around the property.”

“‘Did I think we would get a brand new home for that price? No!’ Angela Lamboo said in an interview. ‘When you think about it, it’s crazy.’”

“Steve Lauritano, owner of Arizona Pro Realty, Inc., and business partner Diane Olson, an ex-Winnipeg police officer now living in Phoenix, said the type of home the Lamboos bought was selling three years ago for $220,000. Lauritano said Phoenix-area house prices haven’t been this low since the late 1980s.”

“Overextended homeowners have been losing their homes left and right, the banks are flooding the market with repossessed properties, and desperate builders and developers are unloading new homes at bargain-basement prices to reduce their debt loads.”

“And because nervous Phoenix residents aren’t buying move-up homes like they used to, builders are bending over backwards to accommodate foreign buyers, Lauritano said.”

“‘The prices for buying brand new are unbelievable,’ Olson added. ‘They’re cheaper than a lot of the (resale) homes that are available through foreclosures.’”

“‘Even if we were to decide to get out in a few years, I think it will be worth more than we paid for it,’ said Tony Russell, of Stonewall. ‘So I think it’s definitely going to be a good investment, as well.’”

“Lauritano agreed. ‘Home prices definitely will go up again,’ he said, adding the only question is when.”

The New York Times. “The rapid decline in housing prices is distorting the normal workings of the American labor market. The Census Bureau, however, calculates how many people move across state lines for all reasons, and that number fell by a startling 27 percent last year, after climbing by almost that percentage for each of the previous three years.”

“Out of 3,500 employees in the United States, Applied Industrial Technologies normally transfers 25 to 30 each year from one center to another, or to the headquarters in Cleveland.”

“Almost all are career people rising in the ranks. Despite the opportunity, transfers have fallen by half, VP Richard Shaw said. That is mainly because transferred employees too often find themselves owning two homes — one in the old location and one in the new — and paying two mortgages.”

“Applied tries to minimize the problem by paying one of the two mortgages for up to six months, the expectation being that the old home will sell by then. Increasingly, that does not happen, not with inventories of homes across the country at an 18-year high, according to the National Association of Realtors. That makes employees reluctant to move, even for a raise and a promotion, Mr. Shaw said.”

“He tells of one transferred executive ‘who ended up owning two homes for more than six months and, finding himself paying two mortgages, opted to move back to his original city, surrendering his new house to the bank.’”