Housing under pressure: US New and World report

That housing bubble has definitely sprung a leak.

Sales of existing homes fell 2.8 percent in January to a seasonally adjusted annual rate of 6.56 million new units. Existing condominium and co-op sales were even worse, falling 10.6 percent last month.

"In the wake of interest rates peaking in November, I expect we are in a bit of a trough that may be followed by a modest rise and then a general plateau in the level of sales activity,". "Existing-home sales should stay below the record levels experienced over the last two years, but they'll maintain a historically high pace."

Today's bad news comes on the heels of a separate report issued Monday by the Commerce Department that showed that sales of newly constructed homes also fell in January – by 5 percent.

There's a good chance that the housing market will remain under pressure in the coming months. That's because as demand for new and existing homes wanes, the supply of residential real estate is growing.

The Commerce Department, for example, reported yesterday that supply of newly constructed homes on the market had grown to 5.2 months' worth. This marks the first time in nearly a decade that new-home supply crossed the five-month level.

As for the stockpile of existing homes, it's up, too. The Realtors association reported a 5.3 months' supply of existing homes currently on the market. That's up from just 3.7 months in January 2005.

Should supply continue to grow faster than demand, it's likely that housing prices will continue to drop. Existing-home prices were flat in January but are down more than 4 percent from their peak last August. And while the median price of a new home sold in January rose from $229,000 to $238,100, that's still off the October average of $243,900.

Cancelled home orders: Latest bubble prick?

Cancelled home orders: Latest bubble prick?
Friday February 24, 2:52 pm ET

Home builders are growing concerned about an increasing number of cancelled new home orders, which experts say could be a sign of an underlying weakness in the recent run in home prices.

Specifically, the cancelled orders could be the latest warning sign that buyers who were turning to real estate as an investment, rather than for their own housing needs, are shifting out of real estate. And that could mean that in many hot markets, the air is about to come out of over-inflated real home prices overall.

One in 5 reporting more cancellations than six months ago, with 4 percent of the overall group saying the increase in cancellations has been significant.

"When you start to see cancellations, you really get worried," said the trade group.

Typically, a downturn in a local economy -- particularly its job market -- can cause a drop in real estate prices and an increase in home order cancellations.

But the trade group's survey found only 15 percent citing job losses by buyers as a cause for the cancellations. The survey, which allowed the builders to cite more than one cause for cancellations, found 45 percent saying it was due to a buyer's inability to sell their existing home and a third citing the buyers not being able to qualify for financing at a time of rising mortgage rates.

But Seiders and others say a big concern is a factor not cited on the survey, the fear that cancellations are being driven by real estate investors who were ordering new homes with the intention of selling them quickly in a hot real estate market. And Seiders said many of the 72 percent of those surveyed not yet reporting an increase in cancellations are already worried.

Experts believe that the home buyer intending to live in a home is reluctant to cancel an order, even if the market seems to have softened. But an investor-buyer who more closely follows the local real estate market is more likely to cancel an order, even if they lose some deposit money, if they believe that the local market prices have fallen enough that walking away is more cost effective than buying and selling the home.

The flight of investor-buyers from the housing market and the increased cancellations could therefore push real estate prices lower in different markets.

"If you've overbuilt the market and sales get cancelled, you have to do something with the homes," said Seiders. "The incentives we're seeing builders offering are clearly designed to support prices and stop cancellations."

Thursday, luxury home builder Toll Brothers warned that it is seeing investors bail on some markets, and supply now greatly exceeding demand in some cases. Besides the increased cancellations, new signed contracts fell 21 percent compared to a year earlier.

"Speculative demand has ceased and speculators are now putting their homes back on the market. The result has been more supply than demand in some regions," said the company's earnings statement. "Markets such as metro Washington, D.C., which are sound economically and showing healthy job growth, will need to work through their excess supply before the imbalance once again tips in our favor.

Toll Brothers Chairman and CEO Robert Toll said the company's cancellation rate came to 8.8 percent of orders in the most recent quarter, up from a historic level of only 5 to 6 percent.

"At 8.8 percent we hope it's plateaued now," he said in response to a question during the company's analyst call.

And home builders stock analyst Alex Barron of JMP Securities said that Toll Brothers actually has much lower cancellation rates than the industry as a whole. He said some other smaller, privately-held builders have more lax rules about the amount of money a buyer must put down, and how easy it is for them to get the money back if they do cancel.

"They don't have a standard practice; the less money they ask, the higher cancellation rates," said Barron. "I would say for most builders, it's at least 25 percent today."

Barron also is concerned about the impact that investor-buyers could have on the new home market, and the real estate market as a whole.

"I would say that probably for publicly-traded builders, at least 10 to 15 percent of orders were from investor-buyers," he said. "Those are the people driving up the cancellation rates. This (the increase in cancellations) is another warning sign. I think it's something we'll have to deal with for the next two to three quarters until the market stabilizes."

Mortgage applications: way below average

Friday 02/24/2006: The Mortgage Bankers Association yesterday released its Weekly Mortgage Applications Survey for the week ending February 17. The Refinance Index decreased by 4.0 percent to 1571.4 from 1636.7 one week earlier. The blue horizontal line is the 12-month average volume, which is approximately 2,040. The current volume is way below this average.

Contra Costa Times: Home builders

"Depending on where the builder builds ... a great tailwind now becomes a major headwind. It was a great ride up but it could be an ugly ride down," said Zelman.
Even while their earnings were skyrocketing and the shares were soaring, publicly traded home builders didn't win investor respect. Home builders have had years of double-digit earnings growth, through several interest-rate cycles and a mild recession.
They have been taking market share from private developers, and are up to around 30 percent from 8 percent in 1990, according to Zelman. What's more, they have great returns: Industry leaders' return on capital tops 20 percent.
Despite that, investors refuse to pay anywhere near what they pay for the average stock in the major indexes, based on earnings.
Home builders' shares as a group are now trading at six times projected per-share earnings. That means only one thing -- the market doesn't believe the earnings. And at the heart of it, they fear builder bankruptcies, as happened in the early 1990s. "If you talk to a hedge-fund manager, (the home builders) are going from 50 percent growth to 20 percent to down 50 percent. It's totally manic-depressive behavior," said Margaret Whelan, an analyst for UBS who has a far less gloomy view herself.
That's why the bulls need this housing slowdown. They are expecting that the companies will be able to have some earnings growth, grab more market share, and throw off enough cash to buy back stock to shore up their share prices.
"For five years, we've been waiting to see how bad it's going to get. It's honest now. We are going to find out whether bears are right and there's no business at the bottom, or I am right and there's a good business and good earnings at the bottom," said Einhorn, who runs Greenlight Capital, a hedge fund with more than $2 billion under management.
Einhorn has been a fervent home-builder fan for years. At the end of last year, his firm owned 4.4 million shares of builder MDC Holdings, making the midsize builder his second-largest position. His firm is the company's largest outside investor.
He hasn't been alone among elite money managers. Legg Mason's Bill Miller has been buying. Lone Pine Capital, one of the premier practitioners of old-fashioned stock picking, was one of the early bulls and still has major home-builder positions. Ospraie Management added to its position in Lennar in the fourth quarter, according to SEC filings.
How bad is it going to get? Zelman sees a substantial profit squeeze coming. Over the past year, home-builder operating-profit margins were around 17 percent; she said she thinks those margins will fall in the next three years and eventually return to a more typical 10 percent.

Bay Area affordability: 10% on average

Tuesday 02/21/2006: Housing Affordability Index for Alameda, Contra Costa, and San Francisco counties, interestingly enough, continued to remain the same at 11, 10, and 9, respectively. The monthly housing affordability index measures the percentage of households that can afford to purchase a median-priced home in California.

SF Chronicle housing ~ SUNDAY'S FRONT PAGE~

HOUSING -- JUST COOL OR GOING COLD?
As Bay Area sales continue to drop, questions about the market's cycles are taking on a new sense of urgency

Sunday, February 19, 2006

Chronicle Graphic Real estate agent David Aimes of Zephyr Reality in San Fr...

This spring, Bay Area homeowners are likely to know whether the housing market has merely paused before resuming its upward climb or has truly downshifted to the slow lane and, if so, how dramatically.

Last month, the number of homes sold declined for the 10th month in a row and hit its lowest level since 2001, and price gains slowed markedly as well.

Now, the question is, will the market simply cool or will it dive into negative territory?

Each housing cycle in the past has had its own set of twists and turns in which a multitude of factors comes in to play.

As the current housing frenzy exhausts itself, variables ranging from interest rates and employment growth to affordability, new home supply and sellers' willingness to part with their No. 1 asset will help determine the swiftness and magnitude of any downshift.

"Making this cycle more unique ... is that there's been a big increase in homeownership since the early 1990s," said Celia Chen, director of housing economics at Moody's Economy.com. "We've brought a lot more people into the market, and it's uncertain how these people will react in a down cycle."

The Bay Area real estate market typically runs in cycles, forming almost a stair-step pattern of multiyear price increases followed by periods of stagnation or even mild declines.

So far, 2006 is off to a slow start, with fewer houses and condos changing hands than in the past five years. But, historically, January and February don't offer strong data for predicting trends. By spring and summer -- typically the strongest buying seasons -- it should be clear whether this winter's pronounced sales slowdown is here to stay or not and whether it will spread to prices.

At the end of the last two major housing booms in the early 1980s and 1990s, prices in most areas did not collapse.

Even amid job losses, soaring interest rates and worsening affordability, the region's huge price gains of the late 1970s were followed in the early 1980s by relatively small declines before resuming their upward trajectory.

The next cycle saw a more striking correction. The median Bay Area home price crested at $225,000 in January 1990, then dipped as low as $205,000 -- almost 9 percent -- before climbing to $229,000 in the middle of May 1996, according to DataQuick, which releases a monthly report based on county recorder data on new sales. The drop was steeper when adjusted for inflation over the years of the downturn.

"On the coasts, you see price run-ups, and then instead of having large price declines, you have mild declines and flattening for a period -- it's what you'd call a stylized fact of the industry," said Andrew Leventis, economist at the Office of Federal Housing Enterprise Oversight, the overseer of mortgage titans Fannie Mae and Freddie Mac.

The question is: "Where are we in the cycle?" It's not entirely clear, but most observers think we are closer to the end of a booming cycle than the beginning.

Jobs and incomes

The 1990s downturn was accompanied by the crash of the aerospace industry and the loss of hundreds of thousands of jobs statewide.

In Los Angeles, the then-epicenter of the defense industry, employers jettisoned nearly three-quarters of a million jobs within just a few years, sparking a rash of foreclosures and a nearly 30 percent plunge in home prices.

Yet Bay Area real estate weathered the dot-com meltdown -- this region's version of the aerospace industry bust -- remarkably well, considering the area lost about 450,000 jobs in three years.

According to research by the federal government, price appreciation for most of the region dropped from above 20 percent in 2000 to between 5 and 10 percent in 2002 and 2003. The only metropolitan area to dip into negative territory was Santa Clara County, where prices fell by several percentage points in 2001 and 2002.

Though job levels have not returned to their lofty Nasdaq-era heights, the region is expected to add 40,000 new jobs this year and 55,000 in 2007, suggesting that the economy, though not raging, appears to be on solid footing.

"Nothing leads to big declines in house prices except job destruction," said John Krainer, economist at the Federal Reserve Bank of San Francisco.

Interest rates

One important factor that helped offset the steep dot-com job declines, however, were rock-bottom interest rates.

As companies such as Pets.com and Webvan imploded, interest rates were steadily sinking to levels unseen in decades, providing a cushion for a housing market.

In contrast, the benchmark 30-year fixed mortgage interest rate jumped north of 18 percent in the early 1980s, squashing demand for housing and pushing prices lower.

"We would have had a (housing) correction in 2001, 2002 and 2003 if interest rates hadn't been cut as they were," said Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley.

Rosen believes low rates and easy credit have borrowed demand from the future and guided many recent buyers into riskier loans.

Last year, about half of Bay Area home buyers took out interest-only loans, according to San Francisco's LoanPerformance.com. These loans require no principal payments during an initial period. At the end of the period, however, monthly payments jump as principal payments start coming due. With interest rates expected to rise gradually through the year, payments could soar even higher, putting some borrowers into precarious financial positions.

Affordability

The high use of interest-only loans illustrates the eroding ability of many consumers to buy ever-pricier homes, which some experts liken to a balloon that eventually hits the ceiling.

While the average pre-tax household income in San Francisco between 2000 and 2004 grew about 16 percent, from $64,818 to $75,390, home prices rocketed nearly 43 percent -- and probably more in some desirable areas.

According to the California Association of Realtors, only 12 percent of Bay Area households can afford the median-priced home.

"We're really shrinking the number of people who can buy in the marketplace," said Keitaro Matsuda, senior economist at Union Bank of California. "If the market conditions weaken, that could show up more dramatically because there are so few people who can step in and play the game."

On the other hand, affordability indexes don't present the full picture. For one, roughly three-quarters of all home buyers in California are trade-up buyers who can spin equity into down payments on bigger, pricier houses.

Renting vs. buying

As home prices rose at a record pace, rents have lagged far behind -- a fact that alarms some economists who believe monthly prices in the two markets cannot remain far apart for too long.

The cost of the good, in this case the selling price, should reflect the potential income, rent, for the same property.

According to DataQuick, the typical Bay Area home buyer committed to a monthly mortgage payment of $2,867 in December. Meanwhile, the average apartment rent in the region in the fourth quarter was just over $1,324, according to RealFacts, a Novato firm that tracks the rental market.

To some, that discrepancy is yet another sign of an overvalued purchase market.

"There's a disconnect between the fundamental value of the asset and the value the market is producing," said Ed Leamer, director of the prestigious Anderson Forecast at UCLA. "It's just like the dot-com period."

Feathering the nest

But assigning an arbitrary upper limit on the value of real estate may not accurately reflect consumers' nuanced views of their abodes, particularly compared with a rental apartment.

In the aftermath of the Nasdaq nosedive (and accompanying low interest rates) and Sept. 11, there was a noteworthy shift to real estate as a safe investment haven. Refinancings and second home purchases soared, and streets were clogged with contractors' trucks and appliance stores' vans as homeowners beautified their nests to boost value.

Still, there is some concern that too many consumers are devoting exorbitant portions of their incomes toward housing, and therefore remain vulnerable to a slackening in the market. A 2005 Public Policy Institute of California study found that 1 out of every 5 recent home buyers in the state is spending 50 percent or more of his or her income on housing costs -- twice the national average.

Flipping

There is a certain class of home buyers who are in the market strictly for the profits. But in the Bay Area that percentage is fairly low when compared with Las Vegas or Phoenix, or even Hawaii.

Early in 2005, DataQuick reported that the percentage of San Francisco properties "flipped," or bought and sold within the previous six months, had risen from less than 2 percent between 2001 and 2004 to nearly 5 percent.

In other markets with a larger supply of land and freewheeling building environment, however, that percentage can be well into the double digits. Economists keep a close eye on the number of pure investors in a given market, because their lemming-like movements into and out of housing can often prompt a rapid change.

It appears the portion of Bay Area real estate owned by investors is a far cry from those in Southern California in the late 1980s, just before the market tanked.

"We'd drive through new developments, and we'd see no landscaping, no cars in the driveway," Matsuda said. "We asked the builders what was going on, and they were people waiting to flip."

Stickiness

Money poured into a home is unlike any other investment -- people are loathe to make less on a sale than their neighbors.

In official economic parlance, that's called "stickiness."

In other words, even in a slackening market, sellers often resist losing money on a property or simply not making as much as the Joneses next door. Sometimes that can mean sales volumes will decline, but prices will stay resilient; it's a phenomenon that could play out as this cycle wears on.

"We love our homes -- we don't love our shares of GM or Microsoft," Leamer said. "We have a personal valuation of the home because of a vague understanding of the marketplace."

In a booming market, buyers love your home more than you do, Leamer said. But in a downturn, you love it more than they.

Supply and demand

Another factor that may help support the market, some experts argue, is the region's chronic shortage of new homes.

In the past few years, the number of houses and condos built in the region has topped 25,000 per year -- the number California Building Industry Association economist Alan Nevin says is necessary to keep up with job growth and new households. But that number has slipped as low as 15,500 in recent years.

"San Francisco may have more of a chance to not have a severe (correction) because it's so hard to build here," said UC Berkeley's Rosen. "The difficulty in putting on new supply protects home prices from big adjustments."

Though it's probably safe to say the Bay Area doesn't have a glut of new homes on the market, there are some signs of softness. Building giant Centex recently offered buyers in communities from Benicia to Brentwood discounts of between $40,000 and $100,000 on selected models for a limited period.

"People are rejecting higher prices, and in single-family homes in particular, prices have gotten so high that it's pretty hard to qualify," Nevin said.

Superstar status

A tight supply of available land and housing supply is one hallmark of what Columbia University real estate professor Christopher Mayer calls a "superstar city," one in which price declines are relatively rare.

The other is what he calls the concentration of "high human capital workers" -- or a wealthy, educated labor pool. The argument goes that as San Francisco and New York and Boston shifted from manufacturing centers to technology and service hubs, they grew more expensive and attracted people who can afford to live there -- people whose incomes (or maybe wealth) are going up at faster and faster rates.

"The rich can outbid the poor for the limited slots," Mayer said.

The cycle feeds on itself, and these cities draw people from all over the country and the globe.

"People ask why are home prices so high in California, and my response is: 'Everybody in the world wants to live in California,' " said Michael Carney, real estate professor at California State Polytechnic University at Pomona.

In the end, prices are likely to slow and even dip as we enter the end of this real estate cycle. But in the past, it has taken wrenching changes in the economy to seriously rein back the housing market.

What is happening in your neighborhood? Post below.

Chronicle Headlines: Sales falter

Bay Area home sales tumbled to their lowest level in five years last month, and prices hovered well below record territory, further evidence that the region's seemingly unstoppable housing boom may have peaked with the blistering market of 2005.

What remains to be seen is whether the new figures amount to a hiccup or the beginning of a prolonged slowdown.

"The various scenarios are that the market takes a deep, deep downturn to reach an equilibrium or comes in for a soft landing," said DataQuick analyst John Karevoll, who noted that the first two months of the year are generally poor statistical gauges of the market's direction.

January's performance is the latest sign of a cool-off that began 10 months ago when sales counts began declining. Experts have attributed the loss of steam to higher interest rates, prices climbing beyond the reach of many consumers and the inevitable maturing of the decade-old housing boom.

Last month, nearly 36 percent fewer houses and condos sold in the nine-county region in January compared with December and 20 percent fewer compared with January 2005, real estate information firm DataQuick reported Thursday. The month's total was 6,004; it usually ranges between 4,000 and 7,500.

Prices, while still up notably on a year-to-year basis, fell below autumn peaks. The median for a single-family home stood at $628,000, up 13 percent from last January, but 4 percent under November's $656,000. The condo median hit $475,000, up from $410,000 last January but below the October record of $490,000.

The combined median was $607,000; the record was $625,000 in November.

DataQuick's monthly reports are based on filings with county recorders' offices and usually reflect sales initiated 30 to 60 days earlier.

Clearly, the market is shifting to a lower gear as real estate agents report fewer bidding wars and a jump in the number of properties for sale. But housing experts are divided on how long the respite will last and whether 10 consecutive months of declining sales activity foreshadow falling -- or merely stalling -- prices.

Despite a fourth-quarter uptick in mortgage foreclosure activity in the Bay Area, Karevoll said indicators of "stress" -- which can signal an abrupt turn in the market -- are largely absent. Instead, Karevoll predicts sales volumes will continue to track below 2005's totals. Prices -- which could hit new records -- will keep rising in the next couple of quarters, although by single-digits, he said.

Beyond that, Karevoll said, much depends on, among other factors, the global economy, inflation, the federal budget deficit and the direction of interest rates.

For some hint of the Bay Area's trajectory, Karevoll pointed to San Diego, which has been termed the "canary in the coal mine" by economists who have watched closely as that city's price growth rocketed north of 26 percent in late 2004. A short time later, sales totals plunged, and price appreciation has sunk to about 2.5 percent annually.

In the last 12 months, annual appreciation around the Bay Area has dropped from just over 20 percent to about 13 percent.

"I don't see the sky falling (in the Bay Area), but we're coming in for a slower market," Karevoll said.

Those comments mirror predictions for the nation's housing market, which Federal Reserve Chairman Ben Bernanke suggested Wednesday will cool, but not dramatically, given rising incomes and still-low mortgage rates.

But other experts think the Bay Area's high-flying market is due for a steeper correction.

"At some point we have to come to grips with the basic affordability question. This is not an affordable market," said Stephen Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto. "I think prices could drop, and once these things start, they have a snowball effect."

Levy, who estimates prices could drop by as much as 20 percent in the next couple of years, said rising interest rates are quashing the segment of buyers who can only get into the market using riskier, adjustable loans, such as interest-only mortgages. Such products are attractive because they usually carry lower initial monthly payments than traditional mortgages. But when principal payments come due, those payments jump -- even more so if interest rates have risen.

"People chose to bet on future appreciation by choosing loans where they knew payments would go up by a lot -- but they got in cheap," Levy said. "There are no cheap loans now."

In January, the average rate for a one-year adjustable rate mortgage was 5.17 percent, compared with 4.12 percent in January 2005 and 3.93 percent in January 2004.

On Thursday, the benchmark 30-year fixed rate mortgage averaged 6.28 percent, compared with 5.62 percent at the same time last year.

Those rising rates were apparent in the typical mortgage payment buyers committed to paying in January: $2,798. A year ago, the typical payment was $2,344. Adjusted for inflation, mortgage payments are 13 percent higher than in 1990, the crest of the previous boom, DataQuick said.

Real estate agents -- who are usually among the first to sense changes in the market -- say power is now balanced between buyers and sellers after several years of rampant multiple offers, waived inspections and pleading "sell me your house" letters.

That new rubric was summed up earlier this week at a sales meeting at Zephyr Real Estate in San Francisco. Of the 25 sales, 12 properties went for above the asking prices, 9 went for the asking price and 4 sold for below.

"It's not last July where people were willing to pay $450,000 more (than the list price)," said agent Matt Fuller.

Some agents, like Lee Ginsburg of Prudential San Bruno, say they must price their listings more realistically and market them aggressively. On Thursday evening, Ginsburg tried to lure potential buyers to a 2-year-old $573,000 South San Francisco condo by offering a "wine and cheese" open house.

"Buyers have more choices, so I need them to come to my property rather than the others," Ginsburg said.

That said, Ginsburg and others contend the market has been more brisk in the last couple of weeks.

Michael Carney, executive director of the Real Estate Research Council of Northern California at California State Polytechnic University at Pomona, theorizes that an initial softening market may only drive more buyers out of the woodwork, buoying prices and sales over the longer term.

"People are saying we're going to have this collapse of the bubble, but I don't think we're going to have an enormous drop in home prices," Carney said. "One reason is that you have a whole lot of people out there hoping prices fall. Demand is still there somehow."

Rent vs. Buying: better to rent

“As an example, imagine that homes in your area sell in the $450,000 range and rent for $2,500 a month. This rental rate is insufficient to cover monthly ownership costs even with 20 percent down. Imagine that you put down $50,000 and borrow $400,000 at 6.5 percent over 30 years. The monthly cost for principal and interest is $2,528. There would also be costs for taxes and insurance, plus you would have repairs and vacancies. Lastly, that $50,000 down payment is not earning interest.”

“Is this property a good investment candidate? If you can afford the negative cash flow in the first years of ownership, perhaps. If you can’t afford the negative cash flow, then no, it’s not plausible.”

“Q: How do you decide when it’s a good time to change from a renter to an owner? A: According to the National Association of Realtors about 40 percent of all homebuyers are first-timers, so more than three million people look at this issue each year and decide to buy. In addition, there are no doubt others who consider the issue and prefer to rent.”

And a website takes a look at the equation for various US cities. “California and NYC region have biggest house price ‘bubbles’: new list ranks US Cities with most inflated house prices. A house price ‘bubble’ is said to exist where the cost of buying a home is unduly high compared to the cost of renting the same property.”

“A new reference book..has published a list of cities with the largest disparities between owning and renting. It is based on a database compiled by the US Department of Housing and Urban Development that includes 71 thousand households. The top nine cities in the list are all in California or the New York City commuter area. The list below shows a dollar amount for each city indicating how much more expensive it is to buy a home rather than rent.”

1 San Diego, CA - $1,442 per month

2 Anaheim Santa Ana (Orange County), CA- $1,376 per month

3 San Jose, CA - $1,340 per month

4 San Francisco, CA - $1,308 per month

5 Los Angeles Long Beach, CA - $1,211 per month

6 New York City, NY - $1,118 per month

7 Northern New Jersey Areas - $1,030 per month

8 Newark, NJ - $1,017 per month

9 Nassau Suffolk, NY - $991 per month

10 Boston, MA - $981 per month

Marin County prices: PLUNGE

Marin House Prices "Plunge" in January
This is West Bay RE's latest commentary on January, 2006's market performance. I'll put together some charts tomorrow evening because I am too darned tired now.

What a way to start the year. Home sales in Marin County, while not at their lowest level ever, are certainly close to it. With only 114 homes sold in January, sales were off 28% from December and 24% from January 2005. This is the third lowest number of sales in any one month since we've been keeping records: January 1998.

The median price of single-family homes in Marin County also took a nose-dive in January, falling 8.6% from December to $877,500, and, gasp, down 5.7% from January 2005. This is the first year-over-year drop since June 2003. Also, it's the first time the median price has been below $900,000 since December 2004.

The question becomes, is this an aberration, or the start of a new trend? On one hand, the depth of the plunge in January is an aberration. On the other hand, the trend is towards a buyers' market. Looking at pending sales, we see an increase of 13% for homes and 29.6% for condos this month. This portends increasing sales in the month's ahead.

Condo sales were also way down in January with 26 units sold, only one of the all-time low of 25. Interestingly, condo prices set new record highs with the median price rising 12.1% from December to $580,000 and the average price gaining 24.5% to $719,763. That's a rise of 39.1% year-over-year, another aberration.

Contra Costa and Alameda: inventory on the rise again

Tuesday 02/14/2006: In 2005, the inventory increased from just around 2,000 units in the beginning of the year to the record 8,044 units in November - a 400% buildup. After retreating to a tad under 6,000 units during the Holiday Season, the inventory started to turn the corner again. As of the end of the business day yesterday, there were 7,351 units for sale in Alameda and Contra Costa counties. If last year was any indication, another 400% buildup from 6,000 units would mean 24,000 units of property inventory by the time we get to November of 2006. We hope not, but we're only hoping...

Contra Costa: $590K

Monday 02/13/2006: The median price of the monthly expired listings in January stood at $590,000, which is above the red horizontal line that represents the median price of active listings. When it's no longer a seller's market, pricing becomes more sensitive. When a listing is priced above the median price, it may not sell when the listing contract expires. The same principle applies to the specific neighborhood listings.

Loans to "reset": next two years

Barron’s Online has a report on subprime loans. Highlights, “The red hot US housing market may be fast approaching its date with destiny. Indeed, inside the mortgage trade, much anxiety is being focused on a looming ‘reset problem.’ Over the next two years, monthly payments on an estimated $600 billion of mortgages to borrowers with checkered or no credit histories, the ’sub-prime’ market, may zoom as much as 50% higher, as the two-year teaser rates on hybrid adjustable-rate loans expire and interest payments hit their fully indexed levels.”

“In the past, such resets caused little disruption. For one thing, the sub-prime market was strikingly smaller. Only $97 billion of such mortgages were originated in 1996, compared with a mammoth $628 billion last year and $540 billion in 2004. Sub-prime loans outstanding now account for more than 10% of the total U.S. mortgage debt of $8.4 trillion.”

“Moreover, the reset triggers on sub-prime mortgages have dramatically shortened, with the loosening in underwriting standards. During the past two years, ‘affordability’ products, as the industry has dubbed them, have migrated from prime to sub-prime borrowers.”

“Significant sticker shock impends for sub-prime borrowers. The shock will be even greater for the sub-prime borrowers who are facing not only a jump from a fixed to a floating rate, but also the burden of amortizing principal after two years of interest-only payments. And for many, the interest- rate reset and IO expiration will occur on the same day, a reflection of the ‘risk layering’ prevalent in the sub-prime market over the past two years.”

“Glenn Costello of Fitch Ratings estimates that at least a quarter of all sub-prime borrowers facing resets may have precious little equity left, even with the huge surge in home prices in the past two years. Many piggy-backed loans to borrow the down payment on their homes, in addition to taking on a conventional mortgage. ‘For some borrowers, there will just be no loan-to-value gap left,’ Costello contends.”

“Even more ominous for the sub-prime borrowers with more than $600 billion or mortgages resetting in the next two years would be new standards for ‘nontraditional’ mortgage products that have been jointly proposed by a number of federal regulators.”

“Obviously, any smash-up in the sub-prime market would hurt lenders. Some such as New Century Financial (NEW) are set up as real-estate investment trusts and, as such, retain some of their securitizations and those of other players. In a bad market, most of the blood would spilled in the lower-ranking tranches of sub-prime mortgage-backed securities, bonds rated triple-B minus and below.”

“(A) New York hedge-fund manager is busily shorting triple-B and triple-B-minus tranches in sub-prime securitizations. The fund is also short various collateralized debt obligations, an estimated $50 billion or so invested mostly in the junior tranches of sub-prime securitizations. ‘These CDOs…could get completely wiped,’ the manager says. The liquidity of the sub-prime market depends on continued purchases by CDOs of the randier tranches of sub-prime securitizations. Should this funding dry up, the sector’s financing structure could seize up. And that would spell big trouble not only for sub-prime borrowers, but for the entire U.S. housing market.”

Housing supply: out pacing demand

Friday 02/10/2006: This is the picture of our daily supply and demand (new listings and pending sales). We're already aware of the increase of supply (green curve) after the New Year from the previous charts we've shown you. The demand (red curve) has also turned the corner and started to climb. However, there's still a huge gap between the two (blue double arrow), and that indicates the supply of new listings is increasing faster than the demand. It appears that this is no longer the seller's market. This is the scene in Contra Costa. What do you guys think is happening in the other parts of the Bay Area. Post below.

Mortgage rates: Highest since Dec. 9th

Mortgage applications fell, led by a decline in home purchase loans, as interest rates hit their highest levels since early December.

The MBA's seasonally adjusted purchase mortgage index fell 2.4 percent to 425.1 from the previous week's 435.7. The index is considered a timely gauge on U.S. home sales.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.25 percent, up 0.05 percentage point from the previous week's 6.20 percent. Rates were at their highest levels since the week ended December 9, when they reached 6.28 percent.

Expired listings: off the chart in Contra Costa

Wed 02/08/2006: We see the surging number of expired listings on the first day of the month with absolute amazement. Here are the records: 9/1/05=42 units; 11/1/05=87 units; 12/1/05=137 units; 1/1/06=176 units. We thought 42 expired listing were quite extraordinary back then, and we'd brought that to your attention in October. But the number keeps piling up since.

Housing May Be Beginning a Decline: UCLA

Why do we believe so strongly that housing is set for a decline? The next chart should drive the point home. Not only is housing construction activity holding at rates that in the past have been associated only with much faster population growth than is now being experienced and not only has housing activity been rising for 14 years after past expansion typically stalled out after four years, but population growth has been slowing for the last few years and is set to slow further in the years ahead.
On top of the demographic influences, of course, are the facts that interest rates hit bottom two years ago and have headed up since, while the 2001 - 2003 tax cuts are fully two years in the past. Both fiscal and monetary stimuli had their full effects on housing quite some time ago, and those factors are working to restrain housing activity at present. Furthermore, our reading of the demographics suggests that home construction is above sustainable rates. Finally, there is evidence in a number of regional markets of outright “bubble” market conditions.

On all these grounds, we believe housing is due for a sustained decline. The remaining questions are how hard the fall will be and when it will begin. Again, the recent anecdotal evidence suggests the decline may be beginning. We’ll soon see for sure.

British bankruptcies: 57% higher

The number of Britons becoming insolvent soared to its highest level since records began in the 1960s, according to British government figures released Friday.

More than 20,400 people in Britain went insolvent during the final three months of 2005, rising 15 percent more than the last previous three months.

During the period, 13,501 people went bankrupt, nearly 11 percent more than in the previous three months and 57 percent higher than the same period in 2004, the Insolvency Service said.

The number of properties repossessed by lenders had also risen by 22 percent during the second half of 2005

The rise in bankruptcies and people falling behind with credit arrangements has been blamed on a culture of flourishing credit, which has seen Britons build up debts of over a trillion pounds in mortgages, credit cards, loans and overdrafts, collectively.

Home building stocks ~falling~

The home building stocks have been under distribution, and today the charts really looked like major top-outs. This action in the home-builders has serious consequences for the US economy, and if it continues its going to turn the American consumers gloomy. You don't believe me regarding the housing picture? Check out the chart of the biggest builder in the nation. Ironic, now that all talk of housing seems to have halted, the stocks are finally collapsing. Next phase -- a break in housing prices.

Realtors in the Bay Area: on the decline

Friday 02/03/2006: The number of our local real estate association's MLS membership dropped abruptly to 4,560 in December, a loss of 564 or 11% of the membership in just 1 month. It may be safe to assume that by now most people have probably figured out that the housing market's no longer where the money is. And, unless something dramatic happens that lifts the market again, we're going to benchmark November 2005 as the month our local housing market topped out.