People are too afraid to buy homes right now. They fear they will lose money out of the gate, so to speak. Not good. Housing Rebound Elusive as Market Fails to Reduce Lost Deposits By Kathleen M. Howley http://www.bloomberg.com/apps/news?pid=20601109&sid=a8d4MWhHmDN0&refer=home March 7 (Bloomberg) -- Scott and Kerry Bingham put down a deposit three weeks ago on a new $321,000 house at Heritage Bay, a development set on a golf course about seven miles from the ocean in Naples, Florida. Two days later, they abandoned the deal. Like other prospective new-home purchasers, they were nervous about falling home prices across the country and the prospect their new property could tumble in value. ``We don't want to buy if prices are going down,'' said Scott Bingham, 41, an electrician who owns Power Systems Electric LLC in North Andover, Massachusetts. ``At this point, we're in a holding mode. If we wait, we might be able to get closer to the ocean and get a better deal.'' A year after the housing slump began, the spring selling season is off to a rocky start with a glut of unsold properties and buyers like the Binghams putting off purchases, thwarting any chance of a recovery. The National Association of Home Builders in Washington now expects sales to fall for the sixth consecutive quarter after last month predicting a gain. The biggest stock market rout in four years last week, a jump in subprime mortgage failures and concerns about a possible recession are keeping consumers on edge. About 10 percent of subprime loans were more than 60 days delinquent or in foreclosure as of Dec. 31, up from 5.4 percent in May 2005, according to data compiled by Friedman Billings Ramsey Group Inc. of Arlington, Virginia. The rate was the highest in seven years, according to the report. Toll's Flip-Flop Builders are bracing for another tough year after seeing 2006 sales plunge 17 percent, the most since 1990. For some, such as Toll Brothers Inc., the largest U.S. builder of luxury homes, the lackluster spring market is a surprise. Chairman and Chief Executive Officer Robert Toll told investors three months ago the market may be poised to rebound. It didn't happen. ``We're all a little more disappointed than we were two weeks ago,'' Toll said Feb. 22 on a conference call, responding to questions about February sales. ``We didn't have anywhere near the bump up that we usually see.'' The same day, Horsham, Pennsylvania-based Toll Brothers cut the number of homes it expects to build to 6,000 to 7,000, the second reduction in four months. In August, the company's estimate was 7,000 to 8,000 homes. Toll Brothers also lowered its fiscal year profit outlook on Feb. 22. Miami-based Lennar Corp., the biggest U.S. builder by revenue, expects new home deliveries to tumble 20 percent this year. Hovnanian Enterprises Inc. of Red Bank, New Jersey, the industry's sixth-largest company, reported a fiscal first-quarter loss after the number of contracts signed slid 23 percent. Decline in Deposits Buyers who wrote a deposit check to reserve a Toll Brothers house -- at an average price of $676,139, three times the national median -- declined 5.8 percent during mid-February's Presidents Day holiday weekend, usually the busiest time, the CEO said on Feb. 22. While homebuilders track the number of visitors they get at their model units, they typically don't divulge the data. Toll Brothers broke with that tradition. The company said it took 276 deposits during the holiday weekend, Feb. 17 to Feb. 19, down from 293 deposits in the same period last year. ``That's disappointing,'' Toll told investors on the conference call. The comment was a reversal from Dec. 5, when he said the home market seemed to be ``dancing on the bottom or slightly above.'' That remark helped spark a 2.4 percent rally in homebuilding stocks. Since Jan. 1, a Standard and Poor's index of 16 home construction companies has declined 11 percent. Overpriced Homes When the Binghams started their search a year ago in Sarasota, Florida, they were disappointed. That market was full of overpriced houses, said Scott Bingham. They moved their search to Naples, two hours south, and found things weren't much better. ``I'd say about 70 percent of the homes aren't priced competitively to sell at this time,'' Bingham said. ``I don't want to be the guy who pays too much and then watches the value of my real estate fall through the floor.'' He and his wife had negotiated a $321,000 price for a 1,400- square-foot house with two bedrooms, a den and a garage at Lennar's Heritage development. After putting down a $1,000 refundable deposit, they decided they could do better. As 2007 began, the housing rebound proved elusive. U.S. new- home sales fell in January by the most in 13 years, the Commerce Department said last week. The annualized rate dropped to 937,000, lower than any economist had forecast in a Bloomberg survey and down from the 1.12 million pace in December. No Rebound in Sight The time a completed home stood empty before being sold reached a record 4.8 months, the highest in almost seven years. The time it would take to sell all available properties was 6.8 months, compared with 5.3 months in January 2006. ``The first quarter has slipped back to some degree,'' David Seiders, chief economist of the Washington-based National Association of Home Builders, said in a March 1 interview. ``All this flap about the subprime market going belly up and mortgage lending standards being tightened further up the credit scale might effect sales.'' Seiders predicted a month ago that the first quarter would be the start of a housing revival. Now he's saying the first three months of this year will be the bottom of the slump, with sales falling to an annualized 1 million from 1.04 million in the fourth quarter. Sales probably will rise next quarter to match the rate of the last three months of 2006 and continue to gain through 2007 and 2008, Seiders said. That won't mean the hard times are over, he said. `Sizable Drag' ``Housing will continue to be a sizable drag on economic growth, even if sales have bottomed, because the builders are working off a large inventory,'' Seiders said. ``I expect starts activity to continue downward even after sales begin to rise.'' The spring selling season for new houses typically begins in February, earlier than the market for previously owned homes, which see the bulk of sales from April through June. It typically takes five to six months to complete a new house. Buyers put down a refundable deposit to reserve a property, then give a non-refundable deposit of 5 percent to 20 percent of the home's price when they sign a purchase contract. The house isn't sold until it's finished. Families with children tend to plan household moves to occur before the start of the U.S. school year in September. To guarantee an August move, they have to sign a contract for a built-to-order house by February or March. Buyers `Wary' ``People are looking at the prices of new homes, and they're wary,'' said Nick Rioux, owner of Buyer's Broker Co. in Shrewsbury, Massachusetts. ``The builders aren't adjusting the prices that much because they've sunk so much money into the properties.'' Overall confidence among U.S. consumers rose to the highest in more than five years in February, lifted by rising wages and an expanding job market, the New York-based Conference Board said last week. At the same time, the percentage of consumers planning to purchase a home in the next six months fell to 3.1 percent from 3.3 percent in January, according to the report. ``It's not clear at this point whether the housing market is going to see a bottoming out or if there's going to be a prolonged weakness,'' said Lynn Franco, director of the board's consumer research center. ``The spring selling season will be the telling sign.'' Median Prices Fall The median U.S. price for a new home will fall for most of 2007, said David Berson, chief economist of Fannie Mae, the largest U.S. mortgage finance company. That would make for five consecutive quarterly declines, according to his Feb. 21 forecast. In the current quarter, the median probably will fall 4.5 percent from a year earlier to $233,700, he said. The second quarter's median may decline 4.7 percent, followed by a 2 percent drop in the third quarter, he said. The last three months of the year probably will see a 0.1 percent gain, followed by at least four quarters of increasing prices, he said. For the year, the median new-home price probably will drop 2.8 percent to $238,400, Berson said. The median increased 1.8 percent last year after gaining 9 percent in 2005 and 13 percent in 2004, he said. ``Some people are waiting on the sidelines trying to time the market and buy at the absolute bottom, just like the people who tried to time the top perfectly,'' said Tom Doyle, a real estate agent with Naples Realty Services Inc. in Naples, Florida. Homebuyers seeking clues about the pace of the recovery should look to buyers like the Binghams. They say they're in no hurry to sign a contract to buy a home. ``Prices are going to drop, but it could be nine months before they drop to a level that makes us comfortable about buying,'' said Scott Bingham.
A housing crash has the ability to turn the USA into a 2nd world country again (like in in the Great Depression). They have to pay heath care, mortgage: 30% of families could crack under that kind of pressure. What a dismal life.
We've seen this before. And far worse. The housing slump of 89-91 was extreme compared to what is lining up here. The market is currently facing a devaluation of values that were artificially inflated due to incredibly low interest rates for the past few years. This valuation needs to be worked out of the system, either thru price correction or zero growth for the next few years. While most people would opt for the latter approach, the former is the more likely prospect. How is this different from 89-91? The changing tax code of 86. When the tax code changed, it eliminated the capital gains tax on real estate. At that time, only 40% of the capital gains were taxed. (If you were in a 30% tax bracket, this would effectively mean a 12% tax on your property gains.) This tax was also extended to investment property as well as primary property. And if you reinvested your gains into property of equal or greater value, your tax obligation was further extended. This change in tax code created less demand for real estate as an attractive investment. Many REITs either were eliminated or downsized their portfolios to reflect market conditions. Add to this that savings and loans were writing mortgages that were built on shaky foundations (like the subprime market) and many faltered prompting a federal bailout of the s&l industry. The effect: more properties were thrown on to the market by people who no longer could afford them or wanted them as an investment. This caused a decline in the prices. (supply and demand) As prices declined, so did home owners equity, to the point that many people's mortgage was worth more then the value of the home. What did they do? They walked away from their property and let the bank foreclose (bankruptcy legislation passed last year make it more difficult for individuals to use that forum as a way to walk away from their debts - this will affect how people approach the coming devaluation). Banks were stuck with properties on their books which they did not want, forcing auctions, which further pressured prices until a bottom was found. (I bought a 2bd apt in NY's Battery Park City at one of the auctions for 80k. Had I held onto it, today it is worth almost 1MM) This brief little history is to emphasize that what you are seeing in the real estate market is nothing to what we had 2 decades ago. And we did not go into a tailspin and enter another dust bowl depression as some think will happen, particularly from a non US resident who may or may not be as familiar with historical cycles and facts. And the US should be so fortunate to have Canada's health program. It would be one less thing for us to worry about. Anyway, don't panic. Panic leads to people taking swan dives. Look at it as a buying opportunity. Remember 87. Market was down 22% in one day, 25% over 2, and once people caught their breath, saw it as nothing but a buying opportunity. And stop listening to the news. They love to sensationalize everything. Just my opinion. Good Luck trading. (Personal aside: during the above mentioned crisis, you could drive down the block of your typical suburban neighborhood and see one for sale sign for about every three to four homes. I don't live in the burbs anymore and don't drive, so for those that do: is the same thing prevalent in your neighborhoods? Does it seem like there are nothing but for sale signs on many lawns? Would love to hear how the real people see it.)
The historically unique issue with the new housing problem is that as a proportion of savings, housing equity has grown, relative to cash or other investments. So, problems with that 'equity stash' impact consumer spending and psychology much more disproportionately than in previous housing corrections. The fact that so many people have already tapped that equity stash doesn't bode well for the economy if housing values stagnate, or worse yet, deflate, especially for those who have HELOCs to service monthly.
You and I share a lot of the same concerns about the real estate market's ability to really change things in the US economy. (by the way, where are you in the US?) Since you are actually in the biz, and have many business contacts throughout the country US I'm sure, I would like to get an insider's reply to these questions: 1) Do you believe that a much bigger decline in RE is only concentrated in the bubble markets that we saw: ie Florida, Southern CA, NYC, Arizona, Las Vegas etc.? Or do you believe it will be felt across the board? 2) Are you seeing weakness across all states and areas? My girlfriend's father is a home builder in Houston Texas where land is cheap and housing costs far less - he hasn't seen a huge change in demand last time I talked to him. But Texas is odd - so much land, a house that would go for for $500,000 in the state of NY can be had for 1/2 in Texas. So I don't know if they are a good barometer. 3) Is the real potential weakness yet to be felt until spring/summer sellers hit the market? 4) ARMs and IO mortgages are about to reset in a big way - what do you see happening at that point? 5) Is the RE news we are getting not being portrayed realistically - is it better than we are being told, worse than we are being told, or somewhere in the middle? You do you a great job of sending along all of the RE news that hits the wire services. I'm sure I'm not the only one who would like to hear an insider's predictions.
One of the things I forgot to add concerning then and now: then there was an abandonment of commercial properties as well which probably had a greater effect on the s&l's which effected fire sale pricing to fix books, etc., and caused REITs to die. Today, money is shifting from residential into commercial. Commercial is not faltering but growing. If commercial continues strong, then more projects built, more laborers employed, more tax revenues, yada-yada-yada. Just saying that it's not as bad as you think.
What about the massive inflation of commercial values? The insiders always get out at the top, and we've seen a few just do that. That worries me. Plus, it seems like they never stop building new commercial properties in my area, even though existing ones sit vacant. As far as residential, its winter in the Northeast, everyone waits until spring to sell. Not a lot out of resellers on the market. But plenty of new developments still waiting to be sold. A lot of projects that were talked about being built are suddenly off the drafting table - especially anything condo related. FWIW, a suburban house went up for sale next to my parents' house in upstate NY area - not a single offer to date. But she is pricing it like it was a year ago.