Housing Bubble bust is on

Slow and Steady? Not at all.
May housing numbers were revised downwards. June housing numbers were down 5.3% Y/Y and well below expectations.

What else can we expect to see?
New housing construction is slowing fast.
http://news.yahoo.com/s/ap/20060730/ap_on_re_us/condos_on_hold
Demand is disappearing for existing homes, so why build more.

Meanwhile builders are rushing to finish projects already begun. There is now 7 months of inventory on the market. Rather than lower prices, they offer incentives.
http://news.yahoo.com/s/nm/20060728/us_nm/bizfeature_mortgages_dc_2
Like free swimming pools.
"Extravagant incentives are most prevalent in states such as Florida, California and Nevada, where home prices had risen the most but are now seeing the sharpest softening, analysts say"
But those are developers. What about buyers?
"Speculators have driven up prices by flipping units, he said. But they're now leaving the market — driving down demand — and putting up for sale properties they own, adding to the glut."

"Many condo projects are priced high, in part because developers have to recoup the high prices they paid for land. But most buyers can't afford it."
Developers may be willing to sell at cost.

Housing prices set to plunge.
According to the recent June housing details, housing prices are flat nationwide. A review of metro areas shows that prices are already dropping in major metro areas. That's bad, considering that this is when prices are supposed to go up during the summertime strength.

Add the fact that thousands of new houses are coming onto the market and will be priced aggressively.

http://www.nytimes.com/2006/07/29/business/29charts.html?ref=business
The article rightly says that buyers and sellers are in a stand-off. Buyers don't want to buy at these prices and sellers don't want to drop prices. I guarantee that sellers will blink first. They have to because most of them are speculators. "Increased competition in a shrinking market" and only developers have the deep pockets to weather it out.

What will happen

I think that in 6 months, you will see developers freaking out. The summertime sales results will be clear in the statistics by October. Before that time, anecdotes of aggressive selling will be rampant. Developers won't wait for written proof, the way the general public does.

But developers still need to unload the housing. And so do the speculators. It's hard to estimate the actual gap between demand and supply, and that figure is decidedly local. For example, ~50 miles East and North of San Francisco in the CentralValley (Sacramento, Stockton, Fresno) is a major over supply. Housing supply has dramatically exceeded demand, prices are dropping already and foreclosures are up. 5% of all houses in that area are now for sale

http://www.mercurynews.com/mld/mercurynews/business/14976554.htm

Contrast that with the busy Silicon valley where 1% of all homes are for sale. That figure will double in 3 months as ~ 2000 new homes come on line.

Or Alameda, where the number of homes for sale has skyrocketed over the past year from 2000 to 14,000.

The focus will be on condos - the only affordable option to owning. Watch price competition between nice new condos and really crappy homes. Also, buyers will be insisting on contingencies that call for them to buy the house assuming they sell their own house. Anyone without contingencies will have an edge.

Builders will focus on squeezing more out of the land (which is the sore spot) by building up: more 3 story homes and townhouses.

Meanwhile, the value of the land will drop because builders will stop chasing it - they can't buy, build and sell. That doesn't help the ordinary retail home buyer much, however.

I look around Cupertino, Sunnyvale and Milpitas and I count 5,000~10,000 new townhomes and homes coming online shortly. Are there an additional 5,000~10,000 families waiting to buy? I would say yes. I don't see job growth (where is the massive biotech hiring? Silicon Valley is hiring - but not folks who live here). So these are more renters who seek to buy. And renters can wait.

I would say that developers won't slash prices for another 4 months, and then they will move aggressively. The fire selling will start in earnest in early 2007.

Meanwhile, folks who have to re-finance will get very burned and seek to unload as well.

May will be a massive fire sale building up speed to September.

The only safe place to be is in apartment rentals, especially higher end. A lot of people will move out of houses either to sell at the peak or because they just can't afford the house anymore. I don't have any suggestions at the moment, but an apartment rental REIT would make sense.

In my estimation, I think what will make sellers blink and drop prices 10%, and it's not the developers, it will be the sales agents. When homes aren't selling, they starve. The only way to coaxe buyers into buying is to lower the price. I do think that there are buyers but they are waiting for homes to drop in price. Pent up demand will only emerge as housing prices drop.

And agents will start telling sellers to do so. They will be the strongest advocates of housing price realities. Imagine that: a selling agent is actually the buyer's best friend.

The selling agent will point out the downsides of waiting to sell. They will also point out the costs of buying a home and letting their other home languish unsold for months - at least 5% of the home's value. And they might nit get that other home if they write contingencies tied to selling their first home.

Remember: the Real Estate Agents don't care about the housing price as much as they care about selling the home. While the 2 agents split the 6% commission (watch that drop to 5% btw as competition heats up), their agencies keep 4%. So the average RE agent gets 1% of the home sale price as his/her commission. A $50,000 drop in price means a $500 lower commission. if that's a $1 Million house, we are dropping the commission from $10,000 to $9,500. They don't care. They don't care if you drop the price $100,000. They need to sell these homes. They have no patience and no desire to starve while a greedy seller tries to pocket much more profit than they are rightly entitled to earn.

San Diego and Sacramento have already begun seeing roughly 2 years of price appreciation wiped out. If the same happened in the Bay Area, home prices would drop from ~$750K to ~$550K. San Diego, like the Bay Area, is considered a special market where prices never go down because of its special climate, business factors and land scarcity.

Meanwhile, office vacancy rates in Silicon valley remain flat. Businesses are not growing here. So I am left to wonder where the demand will be when we hit a recession and thousands get lai doff.