Wednesday’s WSJ was a Real Estate watchers delight: 3 articles that cut to the heart of everyone’s favorite cocktail party fodder.
The most ominous was the page 1 Marketplace piece Hot Homes Get Cold. It seems that the areas which saw the greatest home price surges over the past few years — Florida, California, Arizona, D.C., etc. are now "languishing without buyers or even prospects."
Here’s an excerpt:
"Homes that just last year were selling so rapidly that they stayed on the market for just days or even hours — condominiums on the Florida coastline, desert haciendas in California and Arizona, town houses in Washington, D.C. — are now languishing without buyers or even prospects. Many once-booming markets are seeing double-digit declines in sales.
Home sales have been slowing for several months, but real-estate agents in some of these formerly red-hot markets have been surprised at how suddenly market conditions have deteriorated in the past few months.
The Florida Association of Realtors reported recently that sales of existing single-family homes were down about 20% in February when compared to the same month a year ago — and they were off as much as 47% in Naples. In California, sales dropped 15% in February compared with last year, led by a 30% decline in Sacramento, according to the California Association of Realtors. February sales were off year over year by about 19% in Washington, D.C., and down about 25% in and around Phoenix."
The reason for the slowdown is simple economics: Rising Interest Rates + Increasing Supply = Decreased Transactions.
Its not all bad: Many parts of the country are simply slipping back towards normal:
"Nationally, housing sales are a mixed picture. While nationwide sales of existing homes increased 5.2% from January to February on a seasonably adjusted basis, new-home sales dropped 10.5%. Right now, economists say the housing market will have only a modest negative impact on the overall economy, which has been robust. They note that while sales are slackening, they aren’t collapsing — they are, in many cases, simply settling into a normal market pace. Inventories are rising but they haven’t reached an alarming amount. And while demand for homes is easing off in markets that previously sizzled, they are posting gains in cities where prices are still considered bargains, including Indianapolis, Albuquerque, N.M., and Houston."
Mortgage rates are at 5 year highs, and applications are falling. That crimps Demand, just as builders have created a huge surplus of inventory. Its not too hard to figure out what happens next. As transactions slow, it encourages buyers to drop prices. Its the opposite of the virtuous cycle.
The chart with the article was instructive:
Chart courtesy of WSJ
The other article worth exploring is "When to Sell an Investment Property In a Cooling Market for Real Estate" (Answer: As soon a possible). Its geared towards those speculators who got in a bit late in the cycle. The column notes the how prices eventually tend to come down:
"Even if real-estate prices simply stagnate, many property speculators will be reluctant to sell their homes and condominiums, because they will be under water once they figure in the 5% or 6% selling commission.
Indeed, this reluctance to sell at a loss helps explain why a slowdown in home sales typically precedes a price decline. Homeowners have a target selling price — it might be the price they paid, or the price they could have got at the market peak — and they initially refuse to accept anything less."
Lastly, have a look at the graphic of Housing Market History, 1990-2005 — it tracks the market nationally in 5 year increments, and looks at Housing Prices, the change in those prices, and population density. Its interesting stuff.
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Update: April 13, 2006 11:25am
Amusing: How various parties see your home
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Sources:
Hot Homes Get Cold
MICHAEL CORKERY
WSJ, April 12, 2006; Page B1
http://online.wsj.com/article/SB114480737150323674.html
When to Sell an Investment Property In a Cooling Market for Real Estate
JONATHAN CLEMENTS
WSJ April 12, 2006; Page D1
http://online.wsj.com/article/SB114480865922123703.html
Housing Market History, 1990-2005
http://online.wsj.com/documents/info-housingprices06.html
“Its the opposite of the virtuous cycle.”
Go ahead and say it, Barry. The opposite of a virtuous cycle is a vicious cycle and it’s just beginning.
The housing boom is over. The only question left to answer, and nobody will know until everybody knows, is how far housing prices will fall. 10%? 20%? A full-blown meltdown?
Here is a link to check out:
http://www.brookings.edu/es/commentary/journals/bpea_macro/200603bpea_aaronson.p df
From the Housing Bubble II blog:
“If speculators continue bailing, Florida’s condo market could be the first to feel the pain. The number of condos for sale in the Miami area is already double what it was a year ago, according to the state’s realty group. The foreclosure rate is also twice the national level.”
“Many developers just keep on building. Roughly 25,000 condominiums are under construction in the Miami-Dade area today, an amount that exceeds the total number of condo sales in the area that have been completed in the last nine years combined. ‘It’s a scary situation,’ sums up Jack F. McCabe. ‘We are going to see severe downward pricing pressures on condos in the next few years.’”
“Builder concessions are also popping up in other parts of the East. In Virginia, Brookfield Homes Corp. recently launched a ‘FastMove’ special on about 60 homes that are already finished or about to be completed: Discounts on some of its more expensive houses approach $100,000.”
Brookfield Asset Management is a Cdn co. that owns Brookfield Homes. A darling in Canadian portfolios. This stock keeps on zooming up despite a warning! Analysts are saying that the US sales are non material which is total baloney but the market is complacent. Investors really want to believe! When this bell weather stock drops, it’ll be like the fat lady singing.
“Roughly 25,000 condominiums are under construction in the Miami-Dade area today, an amount that exceeds the total number of condo sales in the area that have been completed in the last nine years combined.”
Pure insanity.
I would like to note the Market History graphic looks a bit fishy for my area, showing 25% growth between 2000 and 2005 for Kalamazoo Co. Michigan. No way. Fairly flat market here for most of that time.
This stage is important –the public condemnation of the view that RE is a good investment.
Yeah, the bit that it is location dependent is not irrelevent, but from the more general investment point of view, reaching a consensus that there may be better places to put your dough has weight.
And since some 40% of the construction was for 2nd homes, we can expect a sudden reversal in those const employment figures in the next BLS, yes?
The RE agents who have survived on ~2 sales/year will have to survive on less and although I think it is tricky to tell if they are working or not, the BLS might show that the larger firms have down sized (but will these people own up to this or declare themselves ‘independents’?).
On the ground, it looks like the next step is labor dislocation. Behind the desk, safe from all that dirty work, just between you and me (and my computer screen), I’d say were are in for it from a large bunch that have doubtful transferable skills, esp at previous compensation levels.
Housing is Cooling Off
More data about housing. The cooling off is well on its way.
I don’t like that housing price chart. It averages all the prices (even though it is a median), by aggregating all areas.
Clearly, they need to graph the variations. I’m more interested in the super hot areas. Slice it by region and property type, etc.
Ah.. the quest for more data…
“D’ comments that
“Brookfield Asset Management is a Cdn co. that owns Brookfield Homes. A darling in Canadian portfolios. This stock keeps on zooming up despite a warning! Analysts are saying that the US sales are non material which is total baloney but the market is complacent. Investors really want to believe! When this bell weather stock drops, it’ll be like the fat lady singing.”
A couple of small points (while not disagreeing with the overall thesis of a housing price bubble) – Brookfield Asset Management only owns 52% of Brookfield Homes. Secondly, according to BAM filings, residential property only contributed a net cash flow of $225M of a total of a net cash flow $1,532 for 2005.
I’m not sure if you define that as material or not, but even so, not all of their residential cash-flow comes from Canada, and Alberta. And according to recent Merrill Lynch research, Canadian residential real estate is undervalued by roughly 15%.
So while the US sales might be somewhat important to BAM, I don’t think they are the critical component to BAM that you comment implies.
Jay Walker
The Confused Capitalist
I meant to say, that not all of their residential real-estate income comes from the over-valued US markets. Some of it comes from Alberta, and more generally, Canada.
Jay Walker
The Confused Capitalist