Valley real estate industry not afraid bubble brewing

Source: The Business Journal
Written by Chuck Harvey

As home prices and demand begin to rise again, some residents fear another real estate bubble may be building. However, homebuilders, real estate agents and mortgage brokers insist that conditions are different now, including tougher qualifications for purchasing new or existing homes. Demand for housing has picked up in recent months, but it is not nearly as strong as it was from 2001-2006 when the last bubble inflated to monster proportions. And home availability is limited by a shortage in supply. Also, the number of annual building permits for new home projects have been in the hundreds in major San Joaquin Valley cities in recent years, compared to more than a thousand each year back in 2002-2004. Interest rates are still low, but have been slowly creeping up. And they are expected to continue rising as the job market improves. “Rising interest rates will help prevent another bubble,” said Andrew Wong, director of strategic marketing for Centex Homes. Wong added that today’s tougher loan requirements would prevent most people from getting overextended in credit. “They will not overbuy,” he said. John Bonadelle, owner of Bonadelle Neighborhoods in Fresno, said that unlike the years of the bubble, recent new home price increases have been modest. “We are not where we were six to seven years ago,” Bonadelle said. Also the MLS (multiple listing service) has a limited number of homes for sale right now, he said. Without a lot of homes to purchase, the bubble has little to grow on, he said. “Somebody has to provide housing,” Bonadelle said. “So I don’t believe in a bubble. There’s not much inventory out there.” Bonadelle recalled that six years ago new home prices rose every month. And builders couldn’t construct homes fast enough. That’s not happening now, he said. He added that although there are quite a few improved lots ready to build on, most of the lots are already planned for and are not available for spurts in demand. The basic thought is that even if financing loosened some and demand for new homes soared, it would take time before homes would be available to fill the demand. That would likely limit the size of any new real estate bubble. Dan Hawkins, agent for Realty Concepts in Fresno, said strong demand for existing homes coupled with low supplies have boosted resale home prices significantly in recent months. That has created an artificial bubble, Hawkins said. If new home construction picked up, that situation could change. But building has been slow to pick up again, Hawkins said. As for existing homes, listings are so few that each home receives three to eight offers in the first week it is on the market. Hawkins said more buyers are looking at homes in the Valley now, including some people who gave up homes in short sales during the peak of the market crash. He explained that only about 660 homes are listed in the Fresno area each month. Just a year ago, 3,000 homes were listed monthly. “So there’s pretty heavy demand,” Hawkins said. “We have a big bubble in terms of pent-up demand,” said Mark McMillin, president of McMillin Homes in San Diego. “I don’t know if we have another bubble based on bad loans coming down the pipe.” Mark Navarro, chief financial officer for California Funding and Investments in Fresno, agreed that demand has hit the roof. “We could sell twice as many homes if they were available,” Navarro said. However, an increase in interest rates should slow demand some, he said. Navarro said that although the number of homebuyers has picked up again, the risk of buyers qualifying for a home they can’t afford has sharply declined. One reason is the maximum cost to debt ratio is now 45 percent. It had been 65 percent. Low down-payment FHA loans are still available, but the borrower must now pay a substantial amount to guarantee the loan. The borrower typically pays $4,375 in a lump sum and $281 a month just to guarantee the loan, Navarro said. That has led some borrowers to move from FHA to traditional loans, he said. Conventional loans are cheaper, but credit requirements are much more stringent. Navarro said 75 percent of his customers previously requested FHA loans. Now it is a 50-50 mix with conventional loans, he said. The result is that borrowers must now be more qualified. That has Navarro convinced that the age of the big real estate bubble is behind us. “There is no bubble,” he said. “And there is not just one reason. Everyone who buys a home now is a real buyer … really a quality buyer.” Although prices have increased some, pricing is still artificially deflated, Navarro said. Also, homebuilding remains slow, he said. Builders constructed about 2,400 homes each year in 2005-06. But they only built about 300 homes annually over the last three years. Navarro said he sees the market stabilizing rather than surging into a new bubble. He points out that move-up buyers are on the market again and that is a good sign of market stabilization. It is in contrast to the flood of buyers that often spent beyond their means during the bubble period that led to the real estate crash.

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