Housing Bubble Bursting?

[Randolph Kinney]

David Lereah: 'Don't shoot the messenger'

By MarketWatch
Last Update: 4:22 PM ET Nov 10, 2006

David Lereah has had an easy time of it in the last five years. The chief economist for the National Association of Realtors has been the bearer of nothing but good news to the more than one million members of his trade. And when it comes to Realtors, that is pretty much the only position you want to be in because they can be an awfully surly lot when forced to digest bad news: 'Don't shoot the messenger' rarely works with that crowd.

That's why Lereah wasn't kidding Friday when he told an audience at this year's annual convention in New Orleans that his was a tough speech to make. The numbers have not looked good for housing this year and no matter how optimistically you look at them the numbers look about the same for next year.

But the numbers that really count for Realtors may be these: Lereah predicted the housing downturn will shave membership in the NAR be 8% next year. You're talking about 100,000 or so of the NAR's 1.3 million roster that may be pounding the pavement looking for jobs instead of listings in 2007. And that could still be a half million or so light of what the industry might really need to pare.

One of the biggest problems with real estate sales has long been that there are virtually no barriers to entry. In most states, getting a real estate license takes far less study than getting a hairdressing license, never mind that even a fancy salon cut at $100 doesn't put consumers at risk for one-thousandth of what a house does.

And boom times in the industry draw in many fortune seekers who take out that license and hang it with eager brokers who, because most all real estate agents are independent contractors, may have to invest very little in the new hire while awaiting a cut of any commissions the newcomers do bring in.

All of this is not lost on the veteran agents who understand that the structure of the real estate industry can undermine their own livelihoods. In fact, the packed ballroom in which Lereah made his prediction actually responded with applause at the notion of having 8% fewer colleagues trying to horn in on the action in this declining market.

The complaint is that too many agents are not productive and do not add to the quality of the profession. Especially for the 25,000 or so who spend time and money to travel to this convention seeking to learn something (OK, they will all be down on Bourbon Street partying Saturday night, in matching T-shirts no less), that can be galling.

The fact is that that real estate business is changing in fundamental ways. But the euphoria of the last few years has masked the changes in some ways. The consumer is in control of the real estate transaction these days more than ever, and realtors who have simply been trotting along at the old gait during the good times are going to have to pick up the pace now that the balloon, as Lereah says, has deflated.

You can't really say that is bad news. But if you deliver it, you might want to duck all the same.

Steve Kerch, real estate editor

 

[Randolph Kinney]

Home buyers back out of deals in record numbers (1)

Home buyers back out of deals in record numbers

By June Fletcher and Ruth Simon
From The Wall Street Journal Online

A little over a year ago, buyers couldn't wait to sign contracts to purchase homes. Now, many can't wait to get out of them.

With real-estate prices falling around the country and even pro-industry trade groups predicting further declines over the next year, buyers are backing away from deals in droves. At a semiannual housing forecast conference last week in Washington, D.C., economists reported that contract-cancellation rates for big builders were running around 40% -- about twice as high as last year's levels. Anecdotally, real-estate professionals say they are seeing a similar dynamic in existing-home sales.

Some of the cancellations are by people who signed new-home contracts at one price months ago, haven't yet closed, and are now stunned to see the builder drastically cutting prices on identical properties. Some are by speculators caught short by other investments they can't unload. And some are by people trapped in a chain reaction: They can't sell their old home -- or the buyer has canceled the contract -- so they are being forced to cancel the deal on a new house they are buying somewhere else.

"There are a whole lot of people running from contracts," says Alexandria, VA., real-estate attorney Beau Brincefield. He is currently representing more than 50 buyers who are seeking to get out of contracts on single-family homes, townhouses and condos, compared with none a year ago.

Even though it may mean losing a deposit that could run tens of thousands of dollars -- deposits typically range from 1% to 5% of the purchase price -- many buyers are deciding that is less onerous than the alternative. With median new-home prices already 9.7% below last year's levels, according to the U.S. Commerce Department, bailing out now may be less painful than committing to an expensive, and possibly depreciating, investment.

It's a far cry from the home-flipping exuberance of the past few years, when rising home values fueled a buy-and-sell mentality among millions of homeowners, and trading up became a staple of reality TV and home-improvement shows.

New-home builders are taking a big hit from record numbers of contract cancellations, or "kickouts." Fort Worth, Texas-based D.R. Horton Inc., the nation's biggest developer, says its cancellation rate is currently 40%, compared with 29% a year ago. Meritage Homes Corp., in Scottsdale, Ariz., is reporting a 37% kickout rate, compared with 21% a year ago. And Standard Pacific Corp. says that 50% of its contracts fell through in the third quarter of this year, compared with 18% for the same period last year. The Irvine, Calif.-based developer built 11,400 homes across the country last year. Among its current projects: Glenmeadow, a gated community in Simi Valley, Calif., where three- and four-bedroom homes range from $1.1 million to $1.3 million.

Caught Between Two Mortgages

Cancellations by buyers of existing homes are up as well. Although no formal measures exist, historically they have been in the 2% range, according to the National Association of Realtors. In September, however, nearly half of the 454 agents responding to an online NAR survey said they had recently experienced cancellation rates higher than that.

Sean Shallis, senior real-estate strategist for the Shallis Team of Re/Max Villa Realtors in Jersey City, N.J., says that roughly 22% of his sales have fallen apart before closing this year because the buyers backed out, up from 10% last year. With the market cooling, buyers have decided they can buy a similar property for less. For others, adjustable-rate mortgages have gotten more expensive, making a home purchase too costly, Mr. Shallis says. To reduce the chances of cancellation, he is advising his clients to close their deals as quickly as possible after the offer is accepted, and to put fewer contingencies in the contract. "The longer your property is under contract, the longer the buyer has to talk and think about it and watch the market change."

Mr. Shallis himself is among the would-be buyers with cold feet. Late last year, he agreed to pay $595,000 for a new two-bedroom condominium in Jersey City for his in-laws. He pulled the plug on the deal this summer after his father-in-law's illness scotched the planned move. "My exit strategy was if they didn't move into it, we could sell it or rent it," Mr. Shallis says. But that plan made less sense after the price of similar properties dropped to as low as $529,000. At the same time, higher short-term interest rates made it unlikely that he would be able to cover his mortgage payments and other costs if he found a renter. Instead, Mr. Shallis walked away from the contract and lost his $30,000 deposit.

A sinking home appraisal quashed the deal for retirees Denis and Michael Budge. The couple put their two-bedroom house in Carson City, Nev., on the market a little more than a year ago at $495,000, so they could move to another home they had already bought in Waldport, Ore. After some nail-biting months with few showings and no offers, they finally landed a buyer, who signed a contract in June for $425,000.

Rising Interest Rates

But during the escrow period, as prices in their area continued to slide, the appraisal came in -- at $395,000. The Budges were still willing to sell, even at that greatly reduced price, but the buyer backed out the day before the closing. (Through his agent, he declined to comment.) The Budges pocketed the $1,000 deposit, of course, but now they are stuck with two mortgages -- a hardship on their fixed incomes. "We thought we were going to relax and enjoy our retirement," says Ms. Budge. "Not any more."

Kickouts were high nationwide in the late '80s, and in California and New England in the early '90s, spurred by massive job losses. But until now there's never been a period where cancellations have spiked in the absence of a recession, according to Amy Crews Cutts, deputy chief economist at Freddie Mac. Ms. Cutts says the current jitters are largely a result of investors fleeing the housing market in the last few months, which "slammed [it] into reverse," and consumers' fears that the bubble had burst. Rising interest rates earlier this year also gave buyers who hadn't yet closed on their homes cold feet. The result: a huge backlog of unsold homes, which could further depress prices.

But mortgage rates have fallen recently, and if they stay below 6.5%, Ms. Cutts expects that buyers will regain their confidence by late spring, causing cancellations to ease up. Vienna, VA., housing economist Thomas Lawler agrees, but says builders must continue to cut their production and sell off their inventory so supply and demand can get back in balance. "Builders need to take a bullet," he says.

Buyer's remorse does have legal consequences, but the laws vary from state to state and depend on how the purchase contract was written. Usually, a buyer who defaults will have to give up the "good faith" or "earnest money" deposit that was made when the contract was accepted. But typically there is also some wiggle room written into contracts that allows buyers to cancel without penalty -- for instance, if they can't get financing, if the home inspection uncovers defects that the seller won't correct, or if the seller doesn't make certain disclosures. Just changing your mind, however, isn't a valid excuse to cancel. A court could find that a buyer who got cold feet is in breach of contract and liable for the seller's expenses, plus damages -- or could even force the sale.

Of course, it is better not to wind up in court. To keep deals from falling apart, builders are offering everything from free vacations and cars to help with closing costs and mortgage-rate buy-downs -- and they are cutting prices, too. "They're hungry," says Gopal Ahluwalia, director of research at the National Association of Home Builders, the organization that sponsored last week's forecast conference.

 

[Randolph Kinney]

Home buyers back out of deals in record numbers (2)

Upgrades Required

Most of these incentives are dangled to attract new customers. But as the market has cooled and kickout rates have risen, nervous builders have also been quietly sweetening the pot for buyers they have already snagged but whose contracts haven't yet closed -- just to keep them from bailing out of the deal. Some are even offering to drop the selling price after contracts have been signed.

Two years ago, Rosemary and Paul Owen, both federal employees, signed a $350,000 contract on a three-bedroom condo in Cape Canaveral, Fla., that was yet to be built. Since they knew it would take a long time for the building to be completed -- and the housing market was rapidly rising -- they took their time getting their old house in West Melbourne, Fla., ready for sale. By the time they were ready to sell their three-bedroom home this January, buyers weren't biting. Though they lowered their asking price to $359,000 from $439,000, only 18 people looked at their home over a 10-month period, and no one made an offer.

So they went to the builder in Cape Canaveral to get out of the deal and to get back the $22,000 they had paid for a deposit and upgrades. He wouldn't allow that, but he did offer to lower the price of the condo by $21,000 to $329,000 -- the amount he was asking new buyers to pay for a unit that was identical to the one the Owens had purchased two years ago. He also extended the deadline for closing until the end of November. The Owens haven't decided whether they will walk away from their deposit if they can't sell their old home by then. "We don't need two places," says Ms. Owen.

Meanwhile, builders' willingness to lard up their incentives is putting added pressure on sellers of existing homes to do the same. Many are finding it necessary to add thousands of dollars in upgrades to compete with what builders are giving away. Jim Parker, an exclusive buyer's agent in Atlanta, says that in the last quarter, three out of the five buyers he's been working with have bailed out of a contract, while no one canceled during the same period a year ago. "Before, if something was not perfect, they'd buy it anyway. Now they won't," Mr. Parker says. Buyers are also demanding more upgrades. "They're asking for everything, right down to the flat-screen television," he says. "They're comparing houses to a brand-new house, and they expect the house to be updated with new paint and carpeting."

Since most people who are buying are also selling -- seven out of 10 households already own homes -- some are finding themselves of two minds when it comes to kickouts. Glenn Nudell, a shipping executive, recently got $115,000 in concessions, including help with closing costs and fix-up money, when he bought a 12-year-old five-bedroom home in Skillman, N.J., for almost $1.1 million. If the seller hadn't agreed, he says, "I'd have backed away." But then he had to sell his eight-year-old, four-bedroom home in Princeton, N.J. He made sure it was as polished as a builder's model, with new wood floors and carpeting, new cabinets and even a newly finished basement -- but he couldn't sell it until he had knocked $70,000 off of his original $630,000 asking price. Is he concerned that the buyer of his house might back away from the deal before it closes next month? "Of course," he says.

 

[Randolph Kinney]

Short Sales & Foreclosures

I did an appraisal in north Oceanside yesterday. Subject neighborhood had 4 short sale listings and 1 pending foreclosure sale out of a total of 16 listings and 5 pendings. The foreclosure was pending at $385,000 whereas the median price of closed sales in the last 6 months was $455,000.

It is getting worse here as time moves forward with more short sales hitting the market everyday. And, we don't have a recession or layoffs yet.

I wonder how NAR is going to spin their next median price decrease?

 

[Bobby Bucks]

Home Buyers Crowd Texas Auctions
http://www.realtor.org/rmodaily.nsf/pages/News2006111405

 

[Steve Owen]

Interesting change in real estate agent speak

New Orleans:

http://www.msnbc.msn.com/id/15718835/site/newsweek/

The much-celebrated real estate boom has officially ended; nationally, economists now say, the housing market peaked in August 2005.

It would be kind of interesting to go back and look at what the bubble-bashers were posting in August of 2005.

 

[Karl]

Boils down to simple logic. Once prices exceed what one can afford, there always has been & always will be a problem.

Only problem lenders had was when advertising about REFI they FORGOT to tell those people you can't use your credit cards ever again. & your car , boat toys, will have to last 15 - 30 years, & when advertising GREAT payment to buy a home they left out the other cost incurred by owning a home. such as Taxes, Insurance, ETC

OH and many lenders forgot to tell the people they'd have to pay BACK what they borrowed with intrest.

 

[Randolph Kinney]

U.S. housing starts plunge 14.6% to 6-year low

U.S. housing starts plunge 14.6% to 6-year low

By Rex Nutting
Last Update: 8:30 AM ET Nov 17, 2006


WASHINGTON (MarketWatch) - Starts of new U.S. homes plunged 14.6% in October to a seasonally adjusted annual rate of 1.486 million, the lowest level in more than six years, the Commerce Department estimated Friday. Building permits fell 6.3% to a seasonally adjusted annual rate of 1.535 million, the lowest level in nine years. It was the largest percentage decline in permits in seven years. Housing starts are now down 27.4% from October 2005 levels. Building permits are down 28% year-on-year. The decline in October was much larger than expected by Wall Street economists, who were forecasting a 4.5% drop in starts to 1.69 million. Building permits were expected to fall about 1% to 1.62 million.

 

[Steve Owen]

I recently had the need to review some data on building permits from a small town nearby that has been one of the fastest growing communities in this area for the last several years. Year-to-date, building permits issued for new residential construction in 2006 by the end of October stands at $4.9 million. In 2005, by the end of October, $7.2 million in new residential construction permits had been issued. In terms of new construction, the cooling in the housing sector is starting to be seen in this area. I still don't see indications of major price declines in the resale market here, yet.

 

[moh malekpour]

Now, the stock market has to pay for housing slump, go figure!
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_iqvaPKEpOc&refer=home
http://www.bloomberg.com/apps/news?pid=20601087&sid=aqOnuC2sR5.M&refer=home