Two-Thirds of Lenders Nationwide Say U.S. in Midst of Real Estate Bubble

Philadelphia -- (Business Wire) ^ | 4/04/2006 | Biz Wire Saff

[ex-Texan]

Half Say Burst Has Begun or Will Shortly, According to Phoenix Lending Survey Results; 93 Percent of Lenders Predict Housing Prices Will Drop 10 - 20 Percent

Northeast and West Coast Likely to Be Hardest Hit, Say Lenders

Two-thirds of lenders nationwide believe a real estate bubble currently exists in the United States - and half of them believe it has already begun to burst or will burst in the next six months, according to the results of this quarter's Phoenix Management "Lending Climate in America" Survey.

A significant 93 percent of lenders surveyed expect an anticipated housing correction to result in real estate prices declining 10 to 20 percent across the country.

"In the minds of lenders, the housing bubble has moved from 'Loch Ness monster' myth status to an economic reality that could have a significant, negative impact on the lives of many Americans," said Michael E. Jacoby, Managing Director and Shareholder of Phoenix Management Services. "A year ago, 46 percent of lenders believed we were in a housing bubble. Today, that number has climbed to 66 percent - and many of them believe a correction is imminent and could lead to a drop in housing prices of up to 20 percent."

When asked when they believed the housing bubble would burst, thirty percent of lenders said it has already begun to happen. Twenty percent predicted it would occur in the next one to six months, and 27 percent thought it would happen seven to 12 months from now. Nine percent said it would occur in 2007.

Among the 92 lenders who participated in this quarter's survey, only nine percent said they did not believe a housing bubble existed.

When asked which area of the country was likely to be most affected by a housing correction, 30 percent of respondents named the Northeast, followed closely by 27 percent who predicted the West Coast. Fourteen percent named the Southeast, and five percent, each, named: the Mid-Atlantic, the Mid-West, or said all regions will be affected equally.

Half of all lenders believe a housing correction will result in real estate prices dropping up to ten percent. Forty-three percent of lenders said the decline would be as high as 20 percent.

Despite their belief in the existence of a housing bubble, real estate was not the issue that lenders thought posed the greatest threat to the health of the U.S. economy.

When asked to select from a list of six issues that had the most potential to hurt the U.S. economy, 38 percent of lenders named the federal budget deficit. That was followed by the war in Iraq (18 percent), the trade deficit (14 percent), the sluggish job market (12 percent), low household savings rate (9 percent) and the real estate bubble (9 percent).

Overall, lenders remain wary about the future of both the economy and their customers.

For the first time in five years, they believe the short-term outlook for the economy is stronger than its long-term outlook.

"When we asked lenders how they expected the economy to perform over the next six months, they assigned it a high 'C' grade," Jacoby said. "But when we asked them how it would perform in the second half of 2006, they downgraded the economy to a low 'C.'

"Clearly, there are lingering concerns about whether the economy has fully rebounded in a meaningful way."

Lenders also reported lukewarm growth plans by customers. Twenty-two percent said their customers planned to make new capital investments. Sixteen percent, each, said their customers planned to: enter new markets, introduce new products or services; raise additional capital; or make an acquisition.

Only 14 percent of lenders said their customers planned to hire new employees.

Lenders expect loan demand to remain relatively unchanged, although 39 percent predicted international lending would increase in the next six months. They also remain on the alert for loan losses, with 65 percent predicting an increase.

When asked which industries were the most attractive to their lending institution, lenders named the same three that have topped the list for more than three years - Light Manufacturing (75 percent), Service Companies (73 percent), and Industrial Distribution (72 percent).

Start-ups/New Ventures were deemed the least attractive industry to lend to, with 65 percent naming it unattractive.

Roughly 75 percent of lenders reported plans to maintain their existing loan structures in the $1 million to more than $10 million loan size categories.

Two-thirds of lenders plan to maintain their interest rate spread and fee structures on similar credit quality loans. In the under $1 million loan category, 32 percent of respondents said they planned to increase the interest rate spread and fee structure.

Nearly all lenders expect the Fed to raise rates in the coming six months, but they predicted a smaller rate hike of a half-point or less, compared to previous quarters.

About the Survey

The Phoenix Management Services "Lending Climate in America" survey is conducted quarterly to gauge shifts in lenders' attitudes toward the economy. Ninety-two lenders from commercial banks, commercial finance companies and factors across the country were surveyed this quarter. Respondents completed a written questionnaire during January and February.

About Phoenix Management Services

Phoenix Management Services (www.phoenixmanagement.com) is an operationally-focused advisory firm, providing turnaround, crisis and interim management and investment banking services to middle market companies in transition. Since 1985, Phoenix has aggressively advocated on behalf of its clients in over 700 assignments nationwide across a variety of situations and industries.

[ex-Texan]

"Lenders Predict Housing Prices Will Drop 10 - 20 Percent . . . "

They must still wearing rose colored glasses out there in "Mortgage Broker World." As for myself, I suggest a 15% - 45% drop in prices is more correct nationally.

One recent example is from Boulder, Colorado, a very hot!, hot!, hot! market according to local realtors. It was listed in September, 2004 for the eye popping price of $ 2.28 million. This house has just sat on the market all that time. Recently, the price was reduced down to $ 1,275,000. That is a 45% reduction already. But the automated appraisal site Zillow has the house valued at only $ 745,000.

What's our hypothetical buyer to do? I mean after the house of cards falls apart. I have some suggestions but will keep most of them to myself for a while. Hint: My suggestions involve putting bounties on ruthless crooks. Just joking, people. I would never make that recommendation in a million years. [Need more info?] Our buyer can always punt. Punting is a good tactic, especially today.

[brownsfan]

What is this? A bunch of charlatans. Tell them to read FR, there is no bubble.

Not a big issue for me... I'm in Ohio, we didn't "bubble" much. No one wants to come here, and I'm ok with that!

[festus]

I'd love a 20 to 30 reduction. I want to buy another home.

As to the 13 pct of lenders who think "the sluggish job market" is the biggest threat. What sluggish job market ?

[xcamel]

Idiots do not make for a bubble - unless they're blonde.

A bubble happens when "honest criminals" allow > 50% of the people to by homes inflated in value by > 30% that they couldn't afford even at it's corrected market value.

[Petronski]

[Gay State Conservative]

Not a big issue for me... I'm in Ohio, we didn't "bubble" much....

Many parts of the country didn't experience the same dramatic rise in RE prices that other areas have had over the last 4-5 years.

For example,today,it's difficult to find a condo or co-op in Manhattan (below 95th Street,at least) for less than $1,000/square foot.Also,the house a couple of doors down from where I grew up in suburban Boston (and is very similar to that house) is on the market at this very moment for $1.1 million.

These areas,the Northeast,south Florida,Nevada,California,etc are at at least some risk of a bubble at least partially because the "median household income/median house price" ratio is so out of whack with those in,say,Ohio today...and in those very areas just a few years ago.

[riverdawg]

"Recently, the price was reduced [from $2.28 million] down to $1,275,000. That's a 45% reduction already."

There may or may not be a bursting housing "bubble" (however defined) in Boulder, CO, but declines in *asking* prices provide no evidence of it. Sellers often put highly unrealistic initial asking prices on houses for all sorts of reasons: greed, delusion, incompetent or unscrupulous listing agents, etc. My medium-size city away from both coasts has not experienced a housing bubble; selling prices have increased at an annual rate of 4-5% for the past 20 years. Three years ago, we bought a 3000 square-foot house on a one-acre lot for $293K. A year earlier, the seller had listed the house for $375K. It sat unsold for a year, through asking-price reductions to $349K and eventually 325K. There was no "bubble" except in the mind of the seller and his complicit listing agent.

[Salgak]

What sluggish job market indeed, we have 8 slots we're having one HELL of a time filling. . . and that's here at the West Virginia office, alone. We have 20+ more positions open in the hell that it Metropolitan Washington DC and the Virginia Suburbs. . .

[vin-one]

first of all, Zillow is a joke, secondly the million dollar market has never been as robust as the normal market. I don't believe there is a bubble, just a slow down and a correctiong of the over inflated market. Most areas have already seen a 5%correction.

[robowombat]

In Northern Virginia (Fairfax, Arlington Counties and City of Alexandria) tax assessments released in January produced a real sticker shock impact. In Fairfax County the average assessment increase was $80K. In many zip codes the average was over $100K. Last weekend under beautiful sunny skies the 'peak real estate season' opened and it laid an early Easter egg. I personally went to five open houses on Sunday afternoon in a very desirable area near Mt. Vernon. The open houses weren't drawing flies. One house had exactly two viewers for the entire duration. This was no fluke. I spoke at length to a very successful agent and investor (he sold $26M in 05) and his company reported the same lack of interest across the NOVA area. His contacts with realtor's in other companies reported a uniformly dismal weekend. The belief is that the recent tax assessments have bumped prices to a point where in conjunction with the Fed increasing the base rate another 1/4% to a stalling point the market. Effectively the combination of the last five years of price increases and the increase in interest rates has priced a lot of people out of the market.out of the market: Houses went up 20% last year in this area, and interest rates went up 20% (from 5 1/2 to 6 1/2%) - combined that's a 44% increase in monthly payment. Effectively the combination of prices and mortgage rates have created an unsustainable market. The last time this happened 15 years or so ago led to modest actual price declines and a flat market and price structure for several years before the current boom started with the flood of new mortgage instruments.

[martin_fierro]

[ex-Texan]

I hear you and understand. Sounds like you got a very good deal and a nice piece of land. Out here in Ore-gun builders are trying to sell tiny studio condos for $ 179,000. Or, 'praying that they sell them' is more accurate. Some nice two bedroom condos downtown are listed above $ 300,000. But the condo market is in a severe glut. Who wants to live in a tiny apartment saddled with membership fees and ever municipal increasing taxes? 'Not me,' said the flea.

[vin-one]

You are right on the money for the most part, but we still have a housing shortage in NoVA. There already has been a about a 5% adjustment, but homes are still selling, maybe off 10%, versus the crazyness of last years market.

[RegulatorCountry]

"I personally went to five open houses on Sunday afternoon in a very desirable area near Mt. Vernon. The open houses weren't drawing flies. One house had exactly two viewers for the entire duration. This was no fluke."

Were these houses priced rationally, based upon recent comparable sales, or were they assuming an "automatic" increase in price of X% over comparable properties, based upon the rapid appreciation of recent years?

[riverdawg]

"But the condo market is in a severe glut."

Except in cities where there are building-height restrictions (like DC), the condo market is usually very risky. The high cost of buildable land doesn't constrain condo supply as much as it does detached housing when you can build upward.

[ex-Texan]

China is reported to be dumping U.S. bonds and buying gold right now driving the price ever upwards. Gold is supposed to hit $ 600 in the next few days.

[robowombat]

All seemed to be priced rationally according to what the market has been. A house assessed at $580K was offered at $600K. That is about the normal spread. In NOVA properties sell at above assessments as the norm as assessments are supposedly 'synthesized' by the county to represent a value less than the sales price as a 'break' to taxpayers. Only one of the houses I saw seemed obviously overpriced and it was a very well maintained property in probably the most desirable location of any I visited.

[RegulatorCountry]

"That is about the normal spread. In NOVA properties sell at above assessments as the norm as assessments are supposedly 'synthesized' by the county to represent a value less than the sales price as a 'break' to taxpayers."

Sounds like the county has quite the racket going on there, just riding the coattails ever upward with a pittance of a discount on some arbitrary average calculation of cost per square foot combined with location.

But, houses sell for under tax value all the time, in other areas of the country. The taxman isn't infallible, and has every motivation to err on the high side. Combine ever-increasing tax value with rapid appreciation in purchase price, and you'll reach a saturation point eventually. The really cheap ARM loans aren't so cheap anymore, either, even though conventional is still very attractive in historical terms.

[austinite]

There is no bubble, nothing to see here. Move on.

[dakine]

What is "zillow's" agenda?