The Housing Bubble

Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole

The Housing Bubble

Wall Street is becoming skeptical about the housing bubble. “Centex shares headed for the cellar, dropping 9% in midday trading, after the Dallas-based home builder missed quarterly earnings estimates, lowered guidance and announced it was walking away from land deals in some markets. The warning offered clear evidence that rising interest rates are pulling the choke chain on the housing market.”

“Management also slammed the door on robust growth for 2007, slashing earnings forecasts. Orders fell 11% year over year for the March quarter, an important precursor to actual revenue that gets booked three to six months later when home sales close.”

“A $28 million charge stemed primarily from the forfeiture of land option deposits in the Washington, D.C., San Diego and Sacramento, Calif., areas. The land options writedown is a big deal, says analyst Stephen East. ‘I think what’s significant is the signaling effect of it. This is the first big builder that said, ‘When we promised to buy some land we had some assumptions about what we thought we could get for the land when we put a house on it, and that’s no longer the case,’ he said.”

“Pulte Homes Inc. CEO Richard Dugas warned that the company’s second quarter would likely come up short. Hardest hit are markets that experienced huge price increases over the past two years. Dugas said markets such as Sacramento, San Diego and Northern Virginia, appear to be in the midst of a material correction where house prices are falling, cancellations are surging, traffic is slowing and incentives are up.”

“‘Your first quarter came in light and it looks like your second quarter is going to be light relative to our expectations. So, it’s just not clear why you would be re-affirming the guidance,’ said analyst Margaret Whelan, during the conference call. ‘It seems like we’re going to be disappointed later in the year, she said.”

“Beazer Homes also reported double-digit declines in home orders as rising mortgage rates and housing prices pressured buyers. ‘This whole space, I thought it was bottoming out,’ said portfolio manager Keith Gangl. ‘Maybe it will take a little longer.’”

“Orders for homes, which are not reflected in the revenue, fell 19.4 percent to 4,224, and were off 46.3 percent in the West. Sacramento, California, was particularly hard hit, as orders fell and cancellation rates rose.”

And Holden Lewis reports on efforts to keep the bubble going. “The Methuselah of mortgages has arrived: the 50-year home loan. Statewide Bancorp of Rancho Cucamonga began offering the loan in late March, to California residents. Advertisements have yielded a lot of phone calls and ‘quite a few applications,’ says VP Alex Diaz Jr.”

“‘There are two markets for this,’ Diaz says. ‘One is if they’re looking to purchase a home, because of how expensive housing is. And the other is payment-option ARMs, borrowers are making minimum payments and they’re starting to panic a little bit and look for vehicles to get out of these loans.’”

“Bystanders are dubious of the half-century loan’s benefits. ‘If you run the amortization out, it basically is an interest-only loan, in all practical terms,’ says Jason Flurry, a certified financial planner. ‘If a person is considering something like that, they’re probably trying to squeeze into too much house to begin with.’”

“But just about everyone in California is trying to buy too much house. Of the houses sold in the state in February, half cost more than $535,470.”