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The Fading Housing Frenzy

Luxury Home Sales Slow, Speculators Look Gulfward

By Martin H. Bosworth
ConsumerAffairs.com

November 10, 2005
For months, real estate experts and pundits have been debating the possibility that the frenzied national housing market may be cooling off. This week saw further evidence that the bubble may be deflating, as luxury home builders Toll Brothers reported it would see lower home sales forecasts through 2006.

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The Huntingdon Valley, PA-based residential home construction company reported much higher profits from sales for 2005 than it did for 2004, and a 50 percent increase of revenue in the last year.

CEO Robert Toll attributed the market slowdown to high gas prices and consumer fears, saying that "the true speculator is gone from the market."

The Toll Brothers' forecast added more fuel to fiery discussions of the housing market's decline, stoked by the announcement of 30-year fixed mortgage rates rising to 6.36 percent, their highest level since September 2003.

Market watchers and analysts continue to argue as to the existence of a bubble. Ben Bernanke, nominated to succeed Alan Greenspan as chairman of the Federal Reserve Board, recently told Congress that there is no bubble, and that the astonishing jump in market prices reflected "strong economic fundamentals."

Steve Friedman, national director of housing for Ernst & Young, told the National Association of Realtors that while there is no national housing bubble, there are regional "bubblettes" that may have experienced price increases out of proportion to local wages and housing supply.

Friedman pointed to areas such as Washington, D.C. and Northern California as signs of slowing housing markets, but said that the Midwest and South were still going strong for real estate. In fact, the Commerce Department reported unexpectedly strong construction and sales of new homes in those areas for September.

Many real-estate speculators, perhaps stung by declining residential housing prices in major markets, are flocking to the devastated Gulf Coast and Florida, looking for potential new commercial and residential deals to get in on.

Although the consensus still holds that housing prices will rise, they will do so more in keeping with market norms. Higher mortgage rates will also affect the drive of lenders to push "creative" mortgage products, such as interest-only loans, option adjustable-rate-mortgages (ARMs), and reverse equity mortgages.

A rapid price decline can bring equal parts pain and pleasure to homeowners. A buyer who used a "creative" mortgage plan to purchase an expensive house, while paying on the interest only, may find their property not appreciating fast enough to sell before their mortgage rates increase. Many sellers and realtors are already offering discounts, gifts, and other tricks to get deals closed.

The tax panel commissioned by President Bush to update and simplify the national tax code may have also put a scare into the market. Though it is not likely to become law immediately (if ever), the proposal to limit the deduction on mortgage interest would directly target affluent homeowners who have "jumbo" mortgages.

On the other hand, lower housing prices will open the market up to new home buyers who may have been priced out due to the frenzied price increases, and reduce the reliance on "creative" mortgage products to get into a home.

Whatever the outcome, the housing market pundits are watching and waiting to see what happens next. According to the "Bubble Meter" housing bubble blog, the days of the bubble are coming to an end.

"Falling leaves and falling prices are now occurring in many of the bubble markets," the blogster said recently. "The days of double digit price appreciation are long gone."

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