By Martin H. Bosworth
ConsumerAffairs.com
February 7, 2006
There's more evidence that the once red-hot real estate market is
cooling rapidly.
Lenders are getting nervous about defaults as interest rates rise, foreclosures continue to increase in overpriced markets, and some Realtors are getting into disputes over their sales figures.
Luxury home builders Toll Brothers announced that it was lowering its estimated home sales guidance for 2006, due to what it called "softening demand."
The company claimed an increased backlog of home units by 22 percent as of Jan. 31st, equaling roughly $6 billion. But actual signed contracts and sales dropped by 21 percent to $1.14 billion, a 21 percent drop from the same time frame in 2005.
The company attributed the market slowdown to difficulties in providing utilities and construction inspections to new homes, according to a Reuters report.
Toll Brothers had previously warned the market that 2006 would see a slower pace of home sales, but that the business would remain fundamentally strong.
Many regional markets are seeing not only slowdowns in home sales, but increases in foreclosures. Two different real estate groups in Massachusetts have reported differing figures for drops in home sales in the state.
The Massachusetts Realtors' Association's year-end report claimed a 3.5 percent drop in home sales for 2005. The Warren Group, a New England-based real estate services firm, claimed that the drop was actually 7.6 percent, according to the Boston Globe.
The Realtors' Association claimed the disparity was due to their records' strict focus on realtor-based sales. Their records do not include "for sale by owner" transactions or other types of home sales.
Both associations reported high gains in condo sales in Massachusetts, with the Warren Group's stats at a 12 percent increase from 2004, while the Realtors' Association saw a gain of 3.8 percent.
Another increase for Massachusetts was much less pleasant. Foreclosures shot up by 35 percent through the end of 2005, seeing an increase from 7,003 in 2004 to 9,439 in Oct. 2005.
The explosion in foreclosures was attributed to the proliferation of "creative" borrowing options, such as no-document loans or "interest-only" adjustable-rate mortgages.
The Washington, D.C. metro area, another housing-frenzied market, has been seeing slowdowns in home sales and purchases as well. The Northern Virginia Realtors' Association reported a 24 percent decline of existing home sales in its market as compared to 2004.
The D.C. area is experiencing a "glut" of condo building and inventory, according to a Jan. 31st Washington Post report.
The shift from single-family homes to condos as the ownership vehicle of choice may lead to excessive development, and more potential for the condos to go unsold or the developers to default.
All of the worry over the softening market has led at least one realtor association to stop sharing its data altogether. The Santa Barbara Realtors' Association told local reporters that it would stop providing data on new and existing home sales from its records.
According to the Santa Barbara News-Press, overall home sales for 2005 dropped by 12 percent from 2004. The area is widely considered to be the most overpriced in the country, with median home prices at $1.25 million for 2005.
David Lereah, chief economist for the National Association of Realtors, claimed that "Sometimes people lose sight of the fact that real estate is cyclicalsales will continue at a historically high pace with modestly higher interest rates as the year progresses, and 2006 is forecast to be the third-strongest year on record."
Susan Bies, governor of the Federal Reserve, was somewhat more concerned.
Bies recently issued a warning that banks needed to exercise greater care in the issuing of loans, and that the risks in lending with little documentation or using "creative mortgages" would be "exacerbated by a slowdown in the housing industry."
"Supervisors have also observed that lenders are increasingly combining nontraditional mortgage loans with weaker mitigating controls on credit exposures," Bies said, "such as allowing reduced documentation in evaluating the applicant's creditworthiness and making simultaneous second-lien mortgages as competition in the mortgage banking industry intensifies."
