Viewpoint: Housing bubble going bust nationally

The forecast has come true. The housing bubble has burst. We don’t see much of it yet because Rockford, as usual, lags the rest of the country.

But in places like Florida, California, Arizona and Nevada, all red-hot real estate markets, the party is over. Yet, there is still some denial among owners and investors there., tells of a salesman in Florida who is growing very concerned over his investment, which looks about to tank. He can’t afford to drop the price in line with the going rate for homes in his neighborhood, about $100,000 less than he’s asking. He said: “If I got in a jam, I would have to drop the price, but I am not at that point.” He plans to rent the place rather than take a huge loss.

That is a typical mindset in volatile markets—the belief you can’t possibly lose, and if the price goes against you, you needn’t worry because it will come back. But what goes up comes down.

A story in The Wall Street Journal reported many formerly booming markets are seeing sales drop in double digits. The Journal said these markets are “languishing without buyers or even prospects.” Housing inventories are building, but few are looking to buy.

Florida was once the wildest real estate market in the country, but in February sales of single-family homes dropped 20 percent. California saw a 15 percent decline, while some of the most smoking towns in those states were off twice that amount.

Toll Brothers, one of the nation’s largest homebuilders, recently cut its forecast for new home sales and reported signed contracts were down 21 percent from a year ago.

The Journal commented: “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.” That is likely to happen here in the near future because that’s what takes place when bubbles pop and markets turn. Prices are altered radically, often with no apparent reason.

Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund in Seattle. He also writes a daily market column.

Fleckenstein observed: “Many people will say that the real-estate market has turned due to higher interest rates, and rising rates have hurt. But the real-estate market ignored rates going up for quite some time. Its topping was caused by exhaustion. Same with the stock bubble—many folks think it was rising rates that caused the implosion. That isn’t true. The stock bubble ran until it popped in March 2000, having ignored everything up to that point.”

Speaking of Florida, which has been described as ground zero for the housing market, Mark Zandi, chief economist at Moody’s, gave this analysis of the collapse there: “There were more lenders, more Realtors, more foreign investors than the rest of the country.” That’s how a booming market gets very wild.

What is more than scary is that the unwinding bubble does not just affect this country. The drain is swirling in Australia, the UK, and other countries as well. The process is more advanced in those nations because they have been raising interest rates for a longer time while we acted later.

In Australia, the Sydney Morning Herald reported last week: “The casualty list from Sydney’s property boom is growing. First, a generation of first-home seekers found itself priced out of the market. Then, as house prices finally sagged, thousands of overstretched investors and owner-occupiers fell into trouble.

“Now, even vulnerable people who had nothing to do with the fluctuations of property prices could be hurt. As the state government struggles to repair the holes in the budget caused by stagnant property revenues, the aftermath of the boom could be painful for bystanders like the old, the sick, the disabled and the poor. The suffering would occur if the government were forced to cut services and lift charges for these groups as it covers the shortfall in property taxes.”

Katherine Lane, of Sydney’s Consumer Credit Legal Centre, said: “The cost to these families is horrendous—there is great financial loss, there is stress, there is the embarrassment of losing their house, and then they have to move out of their community.”

The banks and mortgage companies will have the greatest risk. In many cases, they loaned the full purchase price of many homes.

Back to the Florida market; The Journal story quoted real-estate broker Mike Morgan. “We went three days this week with not a single showing. That’s incredible. I have 35 listings. We usually get two to six showings a day. I received more desperate calls from sellers than ever. One lady broke down in tears. Her husband bought two investment properties, and they are now going to lose their ‘life savings’ if they sell the homes in today’s market.”

Fleckenstein said: “A lot of people around the country are going to be badly hurt as this bubble unwinds. And, after they have taken their losses, the financial institutions that were the engine behind this folly will take their own hits.”

From the May 3-9, 2006, issue

Enjoy The Rock River Times? Help spread the word!