Sunday, October 31, 2004

U.S. construction spending flat

Homebuilding outlays down for first time since Feb. 2003

CBS MarketWatch

WASHINGTON (CBS.MW) - A surprising decline in homebuilding ended seven months of strong spending on U.S. construction projects.

Construction spending was essentially flat in September, the Commerce Department estimated Monday. See full government release.

This is the first month that construction outlays have not increased since an outright decline in spending in January.

The flat reading in September was below expectations of Wall Street economists surveyed by CBS MarketWatch. Economists were expecting a gain of 0.5 percent in September. See Economic Calendar

August outlays were also revised slightly higher to a 0.9 percent gain from the 0.8 percent increase previously estimated.

Technically, construction outlays decreased to a seasonally adjusted annual rate of $1.013 billion in September, from $1.014 billion in August, but the percentage decline is less than one-tenth of one percent.

Year over year, construction spending is up 8.9 percent in September.

Homebuilding fell 0.2 percent to $551.6 billion annualized in September after gaining 1.8 percent in August. Private residential spending is up 13.1 percent in the past year.

Nonresidential private spending rose 0.2 percent to $225.8 billion annualized in September after a 0.7 percent gain in August. Nonresidential private spending is up 5.7 percent in the past year.

All told, private spending decreased 0.1 percent.

Within the private sector, spending on offices fell 2.8 percent and transportation fell 1.7 percent.

Public construction outlays rose 0.3 percent to $236.4 billion in September. Public spending is up 3.0 percent in the past year.

In the public sector, spending on educational facilities rose 2.2 percent and spending on sewage and waste treatment plants rose 2.4 percent.

In separate reports, the Institute for Supply Management said its September manufacturing index was weaker than forecast. U.S. Oct. ISM 56.8% vs. 58.9% expected

Meanwhile, the Commerce Department said consumer spending rebounded in September, while income growth remained moderate.

Tuesday, October 26, 2004

Signs point to slowdown in housing market

Signs point to slowdown in housing market

The local real estate market is showing signs of slowing down.

There are more homes on the market in Greater Boston than at any time during the last five years, some properties -- especially the more expensive ones -- are taking longer to sell, and price reductions are becoming increasingly common. Meanwhile, sales of single-family homes across the state fell for the second consecutive month, according to yesterday's report from the Massachusetts Association of Realtors.

''Anyone who tells you it hasn't softened is lying," Linda O'Koniewski, the owner of real estate brokerage Re/Max Heritage in Melrose, said. ''A lot of sellers are afraid the market has peaked. They're saying to themselves, 'If I'm thinking of moving in the next few years, why not cash out now?' "

The Massachusetts Association of Realtors yesterday reported that the number of single-family homes sold statewide last month declined 2.7 percent from a year earlier. While the September median sales price of $346,000 was 11.6 percent higher than a year ago, that's the lowest the monthly median has been since May.

As of the end of last month, MLS Property Information Network Inc., which tracks homes for sale, had 7,034 Greater Boston listings for single-family homes and condos -- 862 more properties than a year ago.

Scott Bauman and his wife are feeling the effects. With a baby on the way, they needed to make a move, and in mid-August, they put their antique Ipswich home on the market for $610,000 with, a do-it-yourself website for sellers.

''We thought we'd get lots of offers," said Bauman, 39, who works for a public-relations firm. After five weeks, they received one offer -- for less than asking price. Their home later went under agreement for $590,000 .

''I don't see any other houses selling nearby," he said. ''We definitely feel lucky."

The Baumans' experience is a far cry from those of many sellers in recent years, when bidding wars and offers over asking price were common.

''In prior years, there were three buyers for every house on the market," said Jim Nagle of Coldwell Banker in Lexington. ''Now there are three houses for every buyer.

''When the market was really hot a few years ago, a house might sell in six to eight to 12 days," said David O'Neil, at Century 21 Spindler & O'Neil in North Reading. ''Now they can stay on the market for 90 to 120 days. The market right now is healthy, but it's not robust as it was a few years ago."

Ellen Slaby, 46, and her husband put their Lexington home on the market at $729,999 in February, with plans to move closer to the city. In August, it went under agreement at $615,000. Slaby said a reason it took so long to find a buyer was that there were so many other homes on the market.

But reflecting another side to the market, she added: ''We had friends who sold their house in a week. They were afraid to tell us because they didn't want us to feel bad."

Indeed, segments of the market -- especially homes that are more affordable or are in move-in condition -- remain strong. Statewide condo sales in September rose 16.6 percent to 1,795 units on a year-to-year basis. The median sales price of a condo was $259,900, up 15.5 percent from a year ago.

And not everyone agrees that the boom -- fueled by historically low interest rates amid the region's limited housing supply -- has ended. Some realtors insist that it's normal to see slow sales and price reductions in the fall because New Englanders hate moving in the winter, and that this season has the presidential election and the Red Sox as added distractions.

''Based on the time of year, I've seen no real change in open-house attendance, general inquiries, nor in the number of houses going under agreement," said executive vice president Michael Jewell, who oversees 85 New England offices of Coldwell Banker Residential Brokerage.

Judy Moore, president of the Massachusetts Association of Realtors, said the launch of military action against Iraq hurt the spring 2003 market. Nervous buyers waited until the fall to make a purchase. As a result, comparing last fall's robust sales activity to this fall's doesn't give an accurate picture, she said. While more homes are for sale this year and homes are staying on the market longer, there isn't enough data yet to say that market has entered a new cycle, she said.

But it does feel weaker to some.

Bill Wendel, president of the Real Estate Cafe, a fee-for-service brokerage firm, said his analysis of Arlington and Belmont shows that ''demand and prices are falling."

Paul Frank, owner of Homefinders Buyer Agency in Foxborough, also sees a market losing momentum.

''Last spring was pretty hot; summer was OK; now it's definitely slower," he said.

Walid Saba, president of MAPASS Inc., which arranges appointments for agents showing homes to potential buyers, said the average number of showings per listing was 6.5 last month, versus 4 a year ago.

''More showings mean it takes longer to sell a house," Saba said. ''Last year, if you saw a house you liked, you needed to bid on it immediately. This year, people are looking, but they don't feel they need to make a decision right away."

According to a recent report by economic analysts at Goldman Sachs, the risk of a downturn in the national housing market is rising. The report points to the fact that the inventory of houses on the market has grown and that building of new units continues at a relatively strong pace. At the same time, many buyers have adopted a speculative mindset, believing that prices will keep going up at a fast rate. In a worst-case scenario, the rising supply of houses on the market coupled with overinflated values could lead to a sharp drop in prices.

Saba doesn't believe prices will plummet any time soon, but said, ''We could see prices flattening."

Indeed, demand already appears to be softening.

Marcus Groff, a computer systems administrator, recently cut the price on his Lowell home. Last month, he put the house on the market for $324,900 . After getting no offers, he came down two weeks later to $309,900 .

Sunday, October 24, 2004

Will the Market Stay Strong, Or Will It Fold?


Published: October 24, 2004, Sunday
New York Times

PRICES of apartments fall 10, 20, 30 percent. Houses languish on the market for months, or even years, as desperate sellers slash their asking prices. Mortgage financing dries up, sucking even more money out of the housing market.

Is this the dire fear-mongering of some bubble-bursting Cassandra, predicting the coming real estate crash? Not at all. Those who were around to witness it will recognize this as a description of the New York real estate market just 15 years ago, when another real estate boom that many thought would never end came tumbling to earth.

Could it happen here again?

''The market has never been better, that I remember it; that's the good news,'' said the developer Donald J. Trump. ''It's also very dependent on interest rates. If they do go up, the market will truly tank.''

Mr. Trump predicted that an increase in mortgage rates of three to four percentage points over the next two years -- a figure not out of line with some economists' predictions -- could have a strong adverse effect. But he added a caveat: ''I just don't think that the politicians can allow the rates to go up because then the economy beyond real estate will tank.''

The boom and bust of the 1980's and early 1990's was created by a confluence of factors. Changes in the tax code spurred a speculative building boom in New York, which led to a glut of apartments on the market. Then, in October 1987, the stock market collapsed, rocking consumer confidence and wounding the city's economic base. Finally, the crisis in the savings and loan industry led to a tightening of lending requirements that greatly restricted the availability of loans.

In many ways, conditions today are very different and New York appears to be in a much stronger position, in both economic and social terms. Crime rates are far lower, neighborhoods are healthier and the city has seen a steady population growth that promises to keep demand for housing strong.

The city's population has grown by 1.1 million since 1980, to 8.1 million, with 100,000 residents added between 2000 and 2003, despite the effects of the Sept. 11, 2001, terror attack, according to Eric Kober, the director of housing, economic and infrastructure planning for the City Planning Department. ''Real growth in population and income means the housing boom that has taken place in the 00's has had a much sounder fundamental basis,'' Mr. Kober said.

Most economists predict, or at least hope for, a soft landing from a period of galloping price increases, with housing values eventually leveling out.

That hasn't stopped some economists from pointing to weaknesses in the housing boom across the country, including prices that may be greatly inflated in relation to income.

And in a boom fueled by low interest rates, many of them are echoing Mr. Trump's concern about what will happen when rates inevitably rise.

There is, however, another factor at the root of today's market that some economists and mortgage professionals say could spell trouble ahead: an easing of credit standards and the proliferation of riskier forms of adjustable-rate mortgages.

Even with interest rates low, many home buyers are choosing adjustable-rate mortgages over more traditional, and safer, 30-year fixed-rate mortgages. That is especially true in areas like New York and California that have experienced very rapid growth in real estate prices.

According to a survey by the Mortgage Bankers Association, 34.8 percent of new mortgage applications received by lenders nationwide in the week of Oct. 10 were for adjustable-rate mortgages, known as ARM's, whose rates can change after a set period and may rise (or fall) considerably over time.

Precise numbers for the New York area are difficult to come by, but interviews with mortgage brokers and bankers indicate that adjustable-rate mortgages are even more popular here than in many other regions.

Melissa Cohn, chief executive of the Manhattan Mortgage Company, one of the metropolitan area's leading mortgage brokers, said that 56 percent of the loans handled by her office in September were ARM's. A year earlier, ARM's were running at 59 percent of all mortgages. Even in July 2003, during a summer when long-term fixed rate mortgages were at their lowest level in decades, her firm had 47 percent of home buyers and those refinancing old mortgages turning to adjustable-rate mortgages.

In many cases, the call to ARM's seems to be a direct response to escalating home values. Prices have climbed so high in New York that many buyers feel they have no choice but to take out an ARM, whose lower monthly payments may be the only way they can afford the home they want.

''They're buying at their upper limits financially and so they're stretching to get into their new property,'' Ms. Cohn said.

The growth of ARM's is paralleled by an increase in total household debt nationwide; a significant portion is credit card debt that is also subject to a potential rise in interest rates. Concerns have risen to the point that Alan Greenspan, the chairman of the Federal Reserve Board, addressed the issue in a speech on Tuesday, when he played down fears of a housing bubble and declared that family finances remain in ''reasonably good shape.''

THE main reason home buyers choose ARM's is that they carry lower interest rates than fixed-rate mortgages, at least during an initial period before the rate is allowed to fluctuate (after that, increases are typically held to no more than two percentage points a year). In a popular type of loan called a hybrid ARM, the initial period before the rate begins to change can often last three, five or seven years. The shorter the period, the lower the rate.

Many New Yorkers choose a hybrid ARM because they plan to sell their apartment before the initial period expires. This is particularly true of young couples who may buy a small apartment with plans to upgrade within a few years.

But not all ARM's are created equal, and some professionals in the housing industry have voiced concern over the growing popularity of a form of ARM known as an interest-only mortgage. These loans can involve even lower monthly payments than a typical hybrid ARM, because the borrower is not required to make payments against the loan's principal during the period before the rate changes. But they can also involve a greater ''payment shock'' if interest rates go up at the same time that a homeowner must start paying off the principal.

Ms. Cohn believes the mortgage system is sound and does not see a crash in real estate prices on the horizon. But she is not without concerns, especially looking ahead three to five years, when many interest-only mortgages in the New York area switch over and could be hit with an increase in interest rates. ''The greater risk to our economy is the end of these interest-only periods,'' Ms. Cohn said. ''They became very popular two years ago. There's a tremendous concentration in these interest-only ARM's that will all mature together. People were attracted to the appeal of the much lower payment without thinking 'what's going to happen to me in five years.' ''

Interest-only loans were generally designed for well-off borrowers who rely heavily on commissions or bonus income. That would allow them to make principal payments on an occasional basis, such as after they receive a year-end bonus. The loans can also be used to take advantage of a rising market, in which a homeowner believes he can sell again at a profit before his rates change. ''What people understand is that their home goes up in value each year by much more than they can pay the loan down,'' said Douglas Baum, president of New Amsterdam Mortgage, which is based in White Plains. He is also president of the New York Association of Mortgage Brokers. By skipping principal payments, he said, ''they create additional cash flow and use the increase in the market to add the equity to the home.'' Of course, that kind of plan doesn't work if home prices fall.

A hypothetical borrower who took out a $400,000 interest-only loan at 4.75 percent, a common rate in today's market, would start with payments of $1,583 a month, according to Ms. Cohn. If the loan's introductory period was five years, even without a rise in interest rates, the payment would jump at the end of that time to $2,280 a month, once principal payments kick in.

With an annual cap on rate increases of two percentage points, in a worst-case scenario, the monthly payment after five years would rise to $2,763, and could rise or fall again each year.

The short-term advantages are easy to see, although the risks may not always be so obvious. A home buyer who could afford $3,000 a month in mortgage payments could borrow $500,000 with a 30-year fixed-rate loan at 6 percent, according to Nagy Y. Henein, president of the Greater Mortgage Corporation. For the same monthly payments, at least before rates change, the same home buyer could borrow $540,000 with a five-year hybrid ARM at 4.5 percent, or $800,000 with an interest-only ARM, also at 4.5 percent, Mr. Henein said.

One of the risks with an interest-only loan, he pointed out, is that unless the borrower has the financial discipline to make voluntary payments toward principal, he could find himself after 5 or 10 years still owing the entire sum he borrowed. ''Let borrower beware -- beware of what you are embarking on,'' Mr. Henein said.

Jeff Schiamberg, an investment banker, was careful to consider potential risks when he chose an interest-only mortgage for the purchase of a $1.15 million apartment in a building at 49 East 21st Street that is being converted to condos. Using a broker at Manhattan Mortgage, he borrowed $975,000, with a 4.5 percent interest rate that will remain unchanged for five years.

His monthly mortgage payment will be about $3,600 a month during the initial period. When real estate taxes and common charges are factored in, his monthly housing expense will be about $5,000. But, he said, after taking a deduction for interest payments from his income tax, his monthly housing cost will be about the same as the $3,000 a month he now pays in rent in the West Village.

Mr. Schiamberg said he and his wife, Jennifer, were able to contemplate the purchase of an apartment over $1 million because of the lower monthly payments allowed in an interest-only ARM. ''We were able to buy a larger place and on an after-tax basis pay about what we're paying now for rent,'' said Mr. Schiamberg, 33, who expects to sell the condo before his interest rates are set to change in five years.

''What we're thinking is regardless of what the economy is five years from now, we'll likely make money by selling the place,'' he said. If not he expects to have the resources to pay off the mortgage in a lump sum and stay in the apartment because ''some day prices will come back.''

One of the reasons interest-only mortgages and other ARM's have increased in popularity is that banks like them, according to Steven B. Schnall, chief executive of the New York Mortgage Company. He is also chief executive of the New York Mortgage Trust, a real estate investment trust that buys mortgage-backed securities.

Since the money a bank or other large institution borrows is often subject to short-term fluctuations in interest rates, the ability of ARM rates to change over time can provide a hedge against future rate increases.

The loans appeal to banks regardless of whether they hold onto the mortgages or sell them on the secondary market to investment trusts, like Mr. Schnall's, or Fannie Mae, the government-chartered company that helps finance the mortgage industry.

''We're underwriting ARM's very cautiously because we're looking to be a long term owner of these loans,'' said Mr. Schnall, who said about half the loans his company makes are ARM's.

But others may not be as careful. Mr. Schnall said he frequently evaluates the credit data backing up groups of securitized ARM's, including factors like loan-to-value ratios, which compare outstanding principal to the appraised value of a home.

''When we look at some of these, you say, 'I wouldn't want to be the one holding that portfolio,' '' he said. ''The loan-to-value ratios are high, the credit scores are not that great and they are adjustable-rate mortgages. Is there going to be a credit catastrophe? I think most people bet not. But I'd say there needs to be caution.''

Mortgage professionals say the current housing boom across the country has been accompanied by a general loosening of the standards by which banks decide who is eligible for a mortgage.

In the early 1990's, banks typically would allow borrowers' monthly mortgage payments equal to up to 28 percent of their gross monthly income. Total debt service, including mortgage payments, could rise to 36 percent. Today, some lenders allow up to 42 percent of gross monthly income to be spent on mortgage payments, with total debt payments rising to 50 percent or more in some cases.

Lending decisions are largely driven by credit scores, and, with lenders relying on computer programs developed by Fannie Mae to evaluate loan applications, borrowers with good credit are allowed larger payments than in the past.

''If I had to look at one sector, I'd be watching underwriting standards,'' said Keith T. Gumbinger, a vice president for HSH Associates, a publisher of financial data that tracks the mortgage industry. Lenders were working overtime the last two or three years to keep up with a surge in refinancing sparked by low interest rates. Now that rates have jogged upward, the refinance business has been more than cut in half, leaving lenders hungry for new business. Lenders made $3.8 trillion in mortgage loans last year, compared with a projected $2.6 trillion this year, according to the Mortgage Bankers Association. ''It's always a curiosity as to whether underwriting standards are being diminished in order to keep up volume,'' Mr. Gumbinger said.

A market with soaring prices has put remarkable pressure on buyers at the same time that it has fostered the illusion that values can go in only one direction. Still, some are aware of the potential pitfalls.

Mark DiMassimo, chief executive of DiMassimo Carr Brand Advocates, an advertising agency, used an interest-only mortgage, obtained through Manhattan Mortgage, to cover about half the price of a $1.4 million home in Rye, N.Y., last month. The rest of the purchase price came from the proceeds of the sale of his Manhattan co-op. At an interest rate of 5.25 percent, which will remain set for seven years, he feels he has taken a conservative stance, combining a large amount of equity with the lower rate and flexible payment structure provided by an ARM. His monthly payment is $3,171, but he plans to make payments against the principal on an ongoing basis.

Mr. DiMassimo said he learned from the experience of his parents, who struggled in the down market of the late 1980's and early 1990's, when they were unable to sell their house in St. James, in Suffolk County, on Long Island. It took his parents several years to find a buyer, he said, and they finally sold the home for about 20 percent less than they paid for it 12 years earlier.

Mr. DiMassimo, 42, said part of his motivation in moving this summer was that he wanted to sell his Manhattan apartment before prices fell. ''I do really believe,'' he said, ''we were buying during a bubble.''

Friday, October 22, 2004

Las Vegas Housing Boom Over?

by Doug French

When homebuilder Pulte Homes publicly announced that it was cutting the price of its homes in Las Vegas from five to 25 percent, Wall Street and the financial press immediately began sounding the death knell for the Las Vegas housing market.

Greg Gieber, an analyst with A.G Edwards & Sons, Inc., typifies the view in the investment community. Gieber penned a research report contending that Las Vegas homebuyers have decided to "run and hide."

Gieber decided to come to Vegas and visit a dozen or so new home communities just after the Pulte announcement to see first hand what was happening and was "somewhat astonished to say the least by the dearth of interest in purchasing a home [that] weekend."

Gieber indicates that the tract sales people he spoke with said that traffic had slowed over the past several weeks and that the agents were fielding calls from homebuyers wondering if their companies intended to drop prices like Pulte had.

Gieber admits in his report that Pulte had been too aggressive with its pricing and was $60 to $80 per square foot above competing product. Las Vegas housing expert Dennis Smith of Home Builders Research echoed this view in his latest newsletter. "Pulte raised their prices in some communities more than $150,000 in a week’s time," Smith writes. "Many of us thought that they went overboard and failed to realize the consequences of what would happen once the out of state investors left the area."

Unlike many other Las Vegas builders Pulte was slow to restrict investor home sales and now is paying the price with numerous freshly built, never occupied homes lining the streets available for sale and competing against the company’s new releases.

Additionally, the company has reportedly fielded 500 lawsuits for having the audacity to lower prices. Ross King, a Denver investor, closed on a 1,900 square foot Pulte home on September 24th at a price of $498,000. After King closed escrow, Pulte lowered the price of that same model to $382,990.

King will be receiving $1,600 per month in rental income from the home, only covering three-quarters of his $2,200 mortgage payment, and none of his homeowners association dues.

"I feel like the biggest idiot. I feel like I was absolutely taken," King told the Las Vegas Review Journal. "I am a smart guy. That’s what makes it even worse."

Las Vegas loves guys like Mr. King who have an unshakable belief in how smart they are yet seem to be horribly challenged in the math department.

Anyone who has been paying attention has noticed the incredible increases in the supply of housing product brought about by the price explosion in the spring of this year.

In February the Multiple Listing Service (MLS) contained 1,400 listings of available resale homes in Las Vegas. By April that number had grown to 8,654, and by September the number was 15,758. At the same time, homebuilders have pulled permits for new construction at a frenzied pace. Through September, permits were running 47.4 percent ahead of last year's pace.

At the same time demand has slowed. In February new home model traffic averaged 100 customers and 3.5 net sales per week. By August, traffic had fallen to 50 shoppers with 2 net sales per week. Last week’s traffic at Pulte’s 19 subdivisions averaged 28 customers per tract according to Metrostudy and the company wrote 31 sales contracts, but had 32 people cancel.

Thus, the Las Vegas housing market has gone from less than a month’s supply of available homes to a five or six month supply according to Lee Barrett, President of the Greater Las Vegas Association of Realtors. An inventory level that is similar to other markets.

So the price system works. High prices send the signal that more of a product is needed and suppliers come to the rescue with more of that product and prices fall.

So what was a sellers’ market is now a buyers’ market.

However, at least one Las Vegas housing expert doesn’t believe the buyers’ market will last much longer. Stephen Bottfeld, executive vice president of consumer research firm Marketing Solutions, told a capacity crowd at his quarterly Market Perspective seminar that Las Vegas is "not on a bubble, but on the edge of a boom."

Bottfeld projects 2005 to be a record year for housing in Las Vegas with 30,000 new home sales and a jump of 22 to 25 percent in the median new-home price to the mid-300,000’s.

He believes the market will begin its ascent in April after the standing inventory is absorbed.

Bottfeld, like Harry Dent Jr., believes that "demographics are destiny." Baby boomers are receiving and will continue to receive the greatest wealth transfer in history and many of these boomers are migrating south of the 35th Parallel. Las Vegas will attract its share of these rich refugees.

Bottfeld pooh-poohs those who use traditional measures that indicate housing has become too expensive in Las Vegas. The median incomes published by government and university sources don’t take into account the shadow economy in Las Vegas. Valet parkers who take home $150,000 a year and cocktail waitress making $125,000 annually are counted as $6.75 per hour workers by those preparing wage studies, according to Bottfeld.

Rental rates also have nothing to do with home prices Bottfeld told his audience. The pool of renters is disproportionately skewed to young adults. Thus, rents are weak because there are fewer young people renting apartments and houses than when the baby boomers were in their 20’s.

Job creation is also strong in Las Vegas Bottfeld points out. There are more than half a dozen new hotels or major hotel expansions currently under construction. Not to mention 50 high-rise condo projects proposed and four major retail malls.

And people are moving to Las Vegas to fill those jobs. On average, over 7,200 people each month move to Las Vegas. Bottfeld says that Las Vegas has the best "brand name" of any city in the country and is what movies were in the 1930’s – "the great escape."

The Las Vegas housing market is far from dead. But will it roar ahead after this brief hiccup as Stephen Bottfeld predicts? Is demographics Vegas’s destiny? Who knows? But, one may recall that Harry Dent, Jr. used demographic studies to predict that the Dow Jones Industrial Average would reach 40,000 by 2007.

October 22, 2004

Housing bubble possibility concerns many homeowners

Though we have witnessed a period of rapidly increasing housing prices, similar increases in price have occurred in the recent past without resulting in a major drop.

Additionally, the housing market has historically demonstrated the ability to withstand a sharp increase in interest rates without sustaining a major correction in housing prices.

Still, given that most American households retain the bulk of their wealth in their homes, even the possibility of a housing bubble is a cause for concern. An additional factor that concerns many experts is the prevalence of adjustable rate mortgages and its potential effect on the stability of the housing market in the event that interest rates rise.

Let's start with a look at prices. The chart below shows median home prices from 1968 to the present day (1968 is the year the National Association of Realtors began tracking housing prices). Despite several corrective cycles in the U.S. stock markets during this period, housing prices have, overall, increased steadily. The few downward adjustments have been small relative to the steady increases in the home prices.

For instance from November 1972 through November 1982, home prices increased 250 percent from $28,800 to $100,800. Subsequently the home prices suffered one of the worst periods between 1982 and 1983, when prices fell from $100,800 (November 1982) to $90,900 (September 1983). This translates to a 9.8 percent price decline, and prices did not recover to 1982 highs until May 1986. Another decline in housing prices occurred from April 1991 through February 1993 when prices declined 8.7 percent (from $140,600 to $128,400), and prices did not recover to the highs until June 1994.

What about interest rates? Many who argue that a housing bubble currently exists cite that an extended period of historically low interest rates has artificially escalated prices, and so a rise in interest rates will cause a fall in prices. There is little doubt that the period of falling and historically low interest rates since the mid-1990s has helped to increase prices. But the assertion that higher interest rates will lead to a downward trend in housing prices is incorrect. In fact, history tells the opposite story.

Consider the period between April 1977 and September 1981, when interest rates (10 year U.S. Treasury Bond Yields) increased from 7.2 percent and touched as high as 15.8 percent. During this same period real estate prices increased from a median value of $58,100 to $95,500, a 64 percent increase.

A possible explanation is that real estate generally fares well in periods of high or rising inflation. A period of rising interest rates typically coincides with rising inflation, which would tend to increase housing prices. When inflation is present, household incomes tend to rise, as do the costs of construction, labor and other inputs, all of which would tend to increase prices.

Thursday, October 21, 2004

Homebuilders Are Stretched Thin

Homebuilders Are Stretched Thin

Even as demand falls and inventories rise, they're taking on debt to boost construction and keep up their heady growth

October 21, 2004

To the casual observer, the homebuilding industry appears to be in remarkably good shape this deep into the housing cycle: Most of the large publicly traded builders such as Lennar Corp. (LEN ) and KB Home (KBH ) are still reporting double-digit gains in both sales and profits. And most also still boast high returns on their investments. Los Angeles-based KB Home, for instance, is on a pace to earn 16% return on capital over the past year. "Other companies only dream about that," says KB Chief Financial Officer Dom Cecere.

Yet despite those solid numbers, cracks are starting to form in the foundations of the nation's largest homebuilders. To maintain their heady growth rates, the big builders are placing ever-bigger bets as they continue adding to their land holdings and the number of houses they have under construction.

BORROWING FRENZY. Even as the Federal Reserve has started raising interest rates -- while signaling that further hikes lie ahead -- builders have continued to throw up new homes at a furious pace. The amount of capital that the 14 largest publicly traded builders have tied up in inventories of unsold homes and land, adjusted for sales, has risen an average 12% over the past year, according to Palladian Research, a New York institutional research firm.

As a result, those inventories now stand at the highest level relative to sales in seven years. And some builders are faring much worse than average. Inventories at Dominion Home (DHOM ) in Dublin, Ohio, for instance, have soared 38.8%, while Ryland Group (RYL ) in Calabasas, Calif., has seen them jump 30.6%. "They are increasingly running their businesses with an 'If we build it, they will come' mindset," says James D. Poyner, a market strategist at Palladian.

To fund all this new construction, homebuilders are burning through cash at a furious pace. For the 12 months ended in June, the large publicly traded builders laid out $373 million more cash than they took in, Poyner notes. Compare that with the much more modest $73 million "burn rate" builders went through for the year that ended in June, 2003. That has left builders increasingly resorting to debt and stock issuance to fund their operations: Of the 14 largest publicly traded builders, six now have debt-to-equity ratios of 95% or higher, including Dominion and KB Home.

OVERBLOWN FEARS. What concerns critics is that this frenzy of borrowing comes as housing demand is starting to cool: Single-family starts dipped 8.2% in September, to a seasonally adjusted annual rate of 1.54 million units. Some Wall Street experts, such as Jan Hatzius, senior economist at Goldman Sachs (GS ), predict that single-family starts could slide an additional 10% to 20% in the coming year as higher rates take their bite. "The risks of a serious problem will rise the longer construction activity remains at its current elevated level," Hatzius wrote in an Oct. 15 report.

Builders counter that fears of a housing crash are overblown. They argue that their land purchases are largely in the form of options that often require them to put down less than 10% of the value of the tracts; even then, they say they often build only when firm orders from buyers exist. What's more, builders contend that if demand cools, they'll have the wherewithal to scale back construction quickly -- and turn negative cash flows back into positive territory by simply selling down their existing inventory of finished homes.

"When the market does slow down -- and our data doesn't show that it is slowing down -- our earnings might slow, but free cash flow will come in bucketloads at that point," says J. Larry Sorsby, chief financial officer for Hovnanian Enterprises Inc., a Red Bank (N.J.) builder. STRAINING TO BUY. Still, there's growing evidence that cooling demand already has some builders coming up with novel ways to produce higher profits. To generate a 12% rise in earnings during its third quarter -- less than half the growth rate of recent quarters -- Miami-based Lennar resorted to heavy land sales to other builders. Kathy Shanley, a senior analyst for Gimme Credit, a bond-research firm, estimates that in the quarter that ended on Aug. 31, Lennar generated roughly a quarter of its $225 million in earnings from land sales to other builders. Moreover, with gross margins of 37% -- well above the 22.9% gross margin Lennar generates from its home sales -- such sales also help keep overall margins up.

By contrast, land sales contributed less than $2 million to Lennar's bottom line as recently as 2001 and 2002. The company's chief financial officer, Bruce E. Gross, says the land sales occurred only because it saw opportunities to exploit heavy demand for new tracts by other builders. "We're not liquidating our assets to meet a number," he insists.

Maybe not. But Lennar clearly needs land sales to counter weak orders in some markets and to boost profits. In its West Coast markets, new orders fell 6% in its fiscal third quarter.

Another potential sign of weakening market conditions: Fully 35% of Lennar buyers took out adjustable-rate mortgages, vs. just 20% a year ago. That suggests that some customers "are straining to afford current price levels, even with low interest rates," says Shanley. Gross says the rising use of adjustable-rate mortgages simply reflects buyers' growing preference for lower-cost, floating rates. "We haven't seen any degradation in credit quality," he says.

CANCELLED ORDERS. In markets that have gotten overheated, some builders are starting to get burned. In Las Vegas, home prices rose an average 41% over the last year, fueled in part by speculators flipping new homes almost as soon as they're finished. With the rise in interest rates, however, the Vegas bubble has burst. Inventories of unsold existing single-family homes in Las Vegas shot up from 1,400 in February to more than 15,000 in September.

That's one reason Pulte Homes (PHM) in Bloomfield Hills, Mich., announced in early October that its 2004 profits will come in as much as $50 million below expectations. After raising prices in some developments by over 50% over the past year, Pulte is rolling them back 8% to 28%.

Still, buyers continue to cancel orders in droves. Some analysts say cancellation rates are running at about 25% throughout Las Vegas. "We overpriced our product relative to the competition," says Pulte Chief Executive Officer Richard J. Dugas Jr. But even with lower prices, Dugas maintains that Vegas remains "among the company's leading markets for margins."

Given the heavy bets builders have placed, a slowdown doesn't auger well. All of a sudden, the housing industry's future is looking more and more like a roll of the dice.

Selling your home in a slow market

Selling your home in a slow market
Bubble or not, demand is softening. That means you'll have to work extra smart to get a good price.
October 20, 2004: 3:41 PM EDT
By Adrienne Carter, MONEY Magazine

NEW YORK (MONEY Magazine) - The halcyon days of home selling are over. No longer can you simply stick a FOR SALE sign on your front lawn and wait to collect your check.

Signs of a softening market began to appear in July, when existing-home sales fell 2.9 percent, followed by a 2.7 percent drop in August.

Says Barbara Kohut, a realtor in the Chicago suburbs, "Houses that would have sold in less than two days last year now stay on the market for 60 days."

With demand dropping, forecasters predict that home prices should grow just 3 percent over the next 12 months -- a far cry from the 9.4 percent average gain of the past year.

To get top dollar in this market, you need to make your house stand out in the crowd. So stop thinking like a proud homeowner and start acting like a marketing manager trying to move the merchandise off a crowded supermarket shelf. The steps you have to take, after all, aren't that much different.

Price it right

The single biggest mistake sellers make in a sluggish market is to overprice their home, says Cleveland agent Tim Prida.

Asking for the moon may work in a period where bidding wars and multiple offers are the norm, but good values are what nab deals when demand slows.

To get a realistic sense of what your home is worth now, check out sales in your neighborhood over the past six months. You can typically find this information online at your local county assessor's site, but you'll need a good real estate agent to put the numbers in context.

Your broker should not only be familiar with conditions in your neighborhood but also with prices for properties that are most comparable to yours. What matters here is the number of bedrooms, bathrooms, and the square footage, as well as other features that may be in particular demand in your area, such as great views or proximity to transportation.

You might even consider underpricing your home by 5 to 10 percent to create buzz, suggests New York realtor Barbara Corcoran.

Often this strategy can lead to multiple bids. And once buyers start competing, their emotions can push the sale price higher than the home's fair value.

She notes, "Nothing turns a buyer on like the idea of a bargain."

Once you've set an irresistible price, make sure the word gets out. At a minimum, your broker should place your home on the local Multiple Listing Service, a database of properties for sale, and advertise in the local newspaper or via direct mail.

Since not all properties on the MLS show up online, it's also imperative to list your home on the realtor's Web site -- some 70 percent of home buyers now search the Net for prospects. You'll get the most traffic if your broker's site is easy to navigate (just one or two clicks to get to your listing) and has multiple still shots of the interior and exterior of the house.

Give your house a makeover

"Preparing your house for sale is like preparing for a blind date," says Linda Mighdoll, author of "Get Ready, Get Set, Sell!" "You have to make a good first impression."

To show your home to its best advantage, concentrate on sprucing up the rooms that buyers care about most: the kitchen and bathrooms.

This is a cost of selling, not an investment, so limit yourself to relatively inexpensive cosmetic jobs like slapping on a fresh coat of paint, replacing broken tiles and updating appliances. A modernized kitchen, realtors note, can sell a whole house.

Neutral, light colors sell too. So paint that purple bedroom a warm ivory, and get rid of the gold shag carpeting from the 1970s. Up the wattage on your lightbulbs to brighten rooms.

Boost your curb appeal by trimming overgrown shrubs. To make the best impression without spending a lot of money or time, paint the front door.

Before your first showing, clean the house like you've never cleaned before. Organize your furniture to draw attention to the nicest features of your home, such as hardwood floors or a fireplace, and pull back the curtains if you have a great view.

You might even seek a professional stager's help in showing off your abode. While these steps help sell homes in any market, they move from optional to essential when prices soften.

Offer incentives

To make a sale in a slow market, you may also have to sweeten the deal. Small gestures can often tip the scales. If you're planning on redecorating when you move into your next digs, for example, consider throwing in your curtains or dining room set.

More sellers are also offering a home warranty. Sold through agents or directly through providers like American Home Shield for $400 or so, these contracts cover the cost to replace or repair major appliances that break within a year of a sale.

If you need to move quickly, up the ante. One increasingly common strategy is for sellers to cover their buyers' closing costs, typically 3 to 6 percent of the sale price.

Seller financing is also gaining popularity. In a typical arrangement, the buyer makes a big down payment, generally 20 percent. But instead of taking out a bank mortgage, the purchaser borrows the remainder directly from the seller, who gets paid monthly, at a rate around 1 percent higher than banks charge on 30-year fixed mortgages.

Of course, you should consider this option only if you don't need a big lump sum from the sale, might benefit from a monthly payment and have thoroughly checked out the buyer's credit history, so you're confident that he or she can make good on the deal. If so, seller financing may not only get you out of your current home but also provide an income for you in your next one.

Tuesday, October 19, 2004

Housing Starts Fall 6 Pct. in September


WASHINGTON (Reuters) - U.S. housing starts slowed by a larger-than-expected 6 percent in September after two months of gains, but permits granted to builders outpaced expectations, a government report showed on Tuesday.

Housing starts dipped to a seasonally adjusted annual rate of 1.898 million from an upwardly revised 2.020 million pace in August, the Commerce Department said. Analysts polled by Reuters were expecting a 1.950 million clip.

Permits, a sign of builder confidence, rose 1.8 percent last month to an annual 2.005 million unit rate from a 1.969 pace in August.

Single-family starts posted their biggest drop since February 2003, tumbling 8.2 percent to a 1.540 million unit level from a revised 1.678 million clip. Single-family starts fell by 5.2 percent in the South, the busiest building region, by 13.1 percent in the West, by 6.5 percent in the Midwest, and by 13.6 percent in the Northeast.

Multi-family housing starts gained 4.7 percent, the third straight monthly increase, to a 358,000 annualized rate.

Regionally, total housing starts fell 1 percent in the South, 7.9 percent in the West, 4.6 percent in the Midwest, and 26.9 percent in the Northeast.

Home building gained fresh strength in the summer on a decline in mortgage rates that were already not far above 40-year lows. Interest rates on the popular 30-year fixed rate home loan eased to a national average of 5.74 percent last week after a government report showing a weak jobs market raised worries that economic growth is slowing.

Sunday, October 17, 2004

Housing Industry Set for Trouble

Sunday October 17, 5:16 pm ET NEW YORK (Reuters) - Homebuilders are set for trouble ahead, with next year's earnings from four of the leading housing companies set to run lower than Wall Street expects, according to a hedge fund manager quoted in the latest edition of Barron's.

Doug Kass, of hedge fund Seabreeze Partners, cites recent disappointing news from Pulte Homes as clear warning of trouble ahead for the entire industry.

Pulte Homes Inc. (NYSE:PHM - News) warned on Oct. 4 that third-quarter earnings from continuing operations would fall short of its earlier forecast, saying it had been forced to roll back some price increases in the booming Las Vegas housing market.

Kass also cited as a big negative the rise of speculation of the housing industry. He contended that the cracks in the housing market are apt to surface in a hurry, and likely to spread rapidly, from one market to the next.

He has sold short four of the leading housing companies -- Lennar Corp. (NYSE:LEN - News), Centex Corp. (NYSE:CTX - News), Pulte Homes and Toll Brothers, Inc. (NYSE:TOL - News) and thinks that next year's earnings for each member of this quartet will run considerably lower than Wall Street expects, according to Barron's.

He's estimating that Lennar's earnings per share will be $5.40, compared with the consensus of $6.31; while for Centex, $6, compared with $7.45; for Pulte, $6.50, versus $8.50; and for Toll, $4.55, compared with $5.70.

He sees Lennar's stock price, now around $42-$43, declining to the low $30s; Centex falling from $47 or so to $35; Pulte taking a tumble from $49 to the low $30s, and Toll retreating from $43-plus to $35.

Wednesday, October 13, 2004

How Housing Has a Hand in Rates

Business Week

Conventional wisdom has it that bond yields influence the residential real estate market. Now the reverse may also hold

The housing sector has been one of the strongest links in the current U.S. economic recovery, while weakness in business spending and the labor sector have weighed on the overall expansion. The steady climb in home prices -- and the consequent rise in home equity -- in a world where other investment opportunities don't appear quite as safe or steady has padded household wealth, while investment in other, less tangible vehicles (like stocks) has hit a plateau.

This state of affairs has led to doomsayers regularly predicting that the housing sector is ripe for its "bubble" to burst. Sure, home prices have continued rising well past what many would consider a suitable expiration date. But expectations of the residential real estate market's demise may yet prove premature.

A BETTER QUESTION. Experts who have made the "bubble" call have banked on irrational, above-trend price gains in regional housing markets and the Federal Reserve's current cycle of interest rate hikes to trigger a buyer's strike. Yes, home values in certain regions may be stretched compared to median income growth. But demographic trends, tight inventories of available homes, and mortgage rates that are still historically low appear to be filling the void for now.

A more compelling question right now might be: How has the housing sector influenced market yields -- and vice versa? While it's typically thought that interest rate changes affect the housing market at certain key junctures, the reverse may also be true.

Take a look at recent moves in the yield on the benchmark 10-year Treasury note. It was close to 3% in June, 2003 -- the lowest level in over four decades -- after a particularly intense round of portfolio hedging by mortgage services against prepayment risk (i.e., mortgages in a portfolio being retired because of refinancing at lower rates by borrowers). That, in turn, was triggered by the U.S. brush with deflation following the start of the war in Iraq, a bruising series of corporate scandals, and the low point of the tech-sector slide.

SLIGHT MODERATION. But that's as low as yields were going to get. The 10-year note has zagged higher in two pronounced waves since the deflation scare was vanquished, first to around 4.5% in the fall of 2003, and then again nearly to 5% this past summer when the Fed began to remove some of its generous policy accommodation. The yield subsequently slipped briefly back below 4% in late September, but a survey of bond investors by JP Morgan suggests the market remains biased toward higher yields.

Yet with fixed mortgage rates not venturing beyond a percentage point of all-time lows, the housing sector continues to navigate these yield swings easily. The most recent round of housing data continued to defy the purveyors of gloom, though the sector has likely peaked with the start of the Fed's latest tightening cycle.

That slight moderation should be evident in September's existing-home sales report, scheduled for release Oct. 25. Despite the disruptions from hurricanes in the South, we expect existing-home sales to remain firm at an annual pace of 6.54 million units for the month, though somewhat off June's record 6.92 million units.

FANNIE'S AND FREDDIE'S SHADOW. Housing starts and permits data for September are more likely to feel a greater impact from Hurricane Charley and fellow storms -- the figures are expected to show a 2% drop, to a 1.96 million-unit annual pace, though this would still represent a historically elevated level.

New-home sales look a bit more vulnerable to the rough weather, with our forecast of a 7.1% slide, to a 1.1 million annual level in the September report, scheduled for release Oct. 27. Home buyers have proven remarkably resilient, and, indeed, 2004 is expected to be another banner year for the housing market.

Overhanging the robust housing market are the actions of housing agencies Fannie Mae (FNM ) and Freddie Mac (FRE), which facilitate the secondary mortgage market by purchasing loans and mortgage-related securities from lenders and other institutions. Though the agencies have widened the opportunity for home ownership, their enormous size has prompted them to engage in hedging (i.e., purchasing Treasuries, or interest rate swaps, options, and other derivatives) to mitigate their exposure to rate risk.

FEELING A CHILL? Fannie's and Freddie's hedging activities, along with those of other mortgage institutions, have temporarily exaggerated movements in the underlying Treasury market. Hedging is enormously complex, and when institutions purchase or sell large amounts of Treasuries or other securities, it may in turn may trigger yield movements.

Indeed, the latest dip in the 10-year note below 4% was generally presumed to be an attempt by shorter-term leveraged funds to cash in on a demand surge for the benchmark issue. Those funds may have sought to lock in profits by selling to some ready buyers: Mortgage servicers rushing to hedge against lower rates by buying longer-dated government debt to lengthen the average maturity of their portfolios. Yields subsequently bounced back to highs near 4.25% by Oct. 4.

Bond-market bulls may continue to feel the chill. The investigation of Fannie Mae's accounting practices, its retrenchment away from market-making, and regulators' requirement that it boost its capital reserves suggests that the rate of its mortgage purchases will slow. Indeed some analysts speculate that the agency might even have to liquidate $100 billion in assets to rebalance its ratios.

While rates backed down to around 4.1% in the wake of a fresh surge in oil prices, risk remains for an eventual run back toward 5%. But even if the 10-year note's yield touches that level -- and mortgage rates move to around 6.8% in sympathy -- the latter remain low by historical standards. And that means the housing sector should be able stay on its feet for some time to come.

Wednesday, October 06, 2004

Rent, Home Price 'Disconnect' Another Bubble Inflator

Realty Times

The disparity between rents and growing home prices could be another indicator of a growing housing bubble poised to doom the residential real estate market.

Along with Fannie Mae's recent woes, the potential for interest rates to rise to unaffordable levels, financially over-extended homeowners, escalating home prices and other bubble indicators, a "disconnect" between home prices and apartment rents could be more Halloween-Horrors-Come-Early evidence of a real estate market bubble about to go pop, according to a paper from RealFacts, a Novato, CA-based rental market monitor.

The theory's author William Ktsanes, RealFacts' director of research and analysis, concedes his "simplistic explanation does not specifically examine the influence of factors shaping supply-and-demand, such as interest rates, population demographics, employment growth, public policy and individual preferences," but the "disconnect" warrants scrutiny.

Generally, says Ktsanes, in many western housing markets where home prices have climbed the most -- Las Vegas, NV and Orange County, San Diego, Riverside and Los Angeles, CA, among other western markets -- apartment rents just haven't kept pace.

In Las Vegas, for instance, while home prices have risen 52.4 percent from the first quarter 2003 to the same period this year, rents have risen only 2.6 percent.

During the same period, rents have fallen slightly in Boise, ID and San Francisco, CA, where home prices have increased 18 percent and 15.5 percent respectively.

"It is interesting to compare the year-over-year change in single-family home prices with the change in apartment rents. One might expect that those 'hot markets' with the highest increases in single-family home prices would experience similarly high increases in apartment rents," says Ktsanes.

That's because, says Ktsanes, property value is somewhat correlated to the expected return on the investment over time. In a tight market, such as in the (San Francisco) Bay Area, land is scarce and in demand and that should point to higher rents than if the same market had an ample supply of land and a potential for new supply.

"While the cost of the home is rising, its fundamental value as an income-generating asset does not seem to be increasing. In other words, people are paying more and more for something that doesn't seem to be worth more and more as an 'investment'. People are betting that the value is coming at the end, from the appreciation of the house's selling price over time rather than a steady increase in the value of the rents it could get in the market. That's where the bubble concern kicks in," he said.

"Without higher rents to support its value, when the demand for 'for sale' housing slows down as interest rates rise, house prices may drop significantly -- perhaps as much as 15 or 20 percent in some markets," he added.

Take Las Vegas. The high prices happening there may not stay there. Recent ordinances seek to stem the tide of speculators some say were artificially driving up prices.

"From what I've heard, regarding the Las Vegas market in particular, the upward drive in prices was strongly influenced by speculators. I actually know people who purchased several homes there. That makes me question whether the higher prices will hold when the investors move their money onward," said Janet Houde, president of the Santa Clara County Association of Realtors in San Jose, CA.

Give Ktsanes credit for being one of the few doom forecasters to thoughtfully make concessions about what his theory doesn't consider.

He doesn't discuss the habits of renters.

During the last economic boom and bust, a large segment of the technology industry's work force holed up in apartments out West for years hoping to get an economic foothold in the region. After the bust, many of those unable to buy, simply departed for cheaper rents in the West and elsewhere. Rents have only just begun to come back in some Western regions.

Demand for homes, on the other hand, temporarily waned, but in a few years waxed with immigrants, single women, baby boomers, and others who instead of investments, sought a roof over their heads to call their own.

The exodus out of California this time seldom matched the number of emigrants who continued to go West in search of a what many consider an invaluable lifestyle.

Workers who were able to cash in before the dot combustion often found the price of homes as "cheap" as the high rents -- when they compared rent with the monthly mortgage -- not the home's price or appreciation.

That, say critics, is a flaw in Ktsanes' argument.

A fairer comparison would be to consider what consumers actually do -- compare rent with the month-to-month cost of owning, something the growing plethora of loan programs facilitates.

While financial advisors caution easy-money mortgages can be penny wise and pound foolish, the loans have sold consumers out West.

"True apples-to-apples comparison would take anticipated mortgage payments and rents. Rents reflect an amortized value of the property, plus some measure of profit. Since mortgage payments are amortized over 30 years typically, the impact of rapid appreciation is diluted over that period through monthly payments," said Mitchell Kreeger, chief appraiser with Affinity Bank in Ventura, CA, who fired off a missive in response to the Ktsanes' "disconnect" theory.

Fairer still would be to include the value of an apartment complex, said Gardner Rees with Stratus Real Estate in Woodland Hills, CA.

"Although rents have not increased significantly in certain markets, values of apartments have," he said.

The same low financing costs that helped boost home values in recent years can also be attributed to the increased value in apartment investments.

"Rents have not increased because personal income has not increased. People have the same amount of money to pay for their rent or mortgage, they can simply buy more with that money due to lower interest rates," Rees said.

Tuesday, October 05, 2004

Cold shower for one of Vegas' biggest homebuilders

Last modified Tuesday, October 5, 2004 8:16 PM PDT

LAS VEGAS -- Pulte Homes Inc. is cutting new home prices in Las Vegas, abruptly abandoning aggressive increases that helped drive up housing costs by tens of thousands of dollars.

The company, one of the nation's largest residential builders, also lowered third-quarter and full-year earnings expectations, citing sluggish sales from its southern Nevada developments.

The price cuts in one of the nation's hottest real estate markets sent Pulte shares down 7 percent Tuesday to $52.45 after an 8.6 percent decline Monday. It also weighed on others in the housing sector.

But most industry officials shrugged off the news, attributing the move to overly aggressive pricing rather than a slowdown.

"The main thing is, people are seeing that customers do have a limit," said Arthur Oduma, a real estate analyst for Morningstar Inc. in Chicago. He characterized the Pulte price shifts as "a hiccup."

Las Vegas is Pulte's second largest market after Phoenix. Those two are the only markets that represent more than 10 percent of the company's business.

Pulte, headquartered in Bloomfield Hills, Mich., cut prices in 18 of 23 southern Nevada developments it markets under the Pulte name, and all four of its Del Webb division communities in the Las Vegas and Henderson area.

"The supply and demand equation has changed," said Sheryl Palmer, Nevada area president for Pulte Homes. "That's simple economics."

Pulte price reductions ranged from 5 percent to 28 percent, with most in the 10 percent range, Palmer said. One Pulte home originally priced at $593,000 had been reduced to $425,000 and one home in Sun City Anthem was reduced from $656,000 to $499,000.

Palmer said Pulte did not plan price cuts in its other 44 markets around the country, and did not believe the housing bubble had burst in Las Vegas.

"I can tell you this is an isolated issue here," she said. "What we're doing is recognizing the market is shifting, not burst."

KB Homes, the largest builder in southern Nevada, said it did not plan to follow the lead of the region's second-largest builder.

"Our sales continue to remain very strong and very healthy," said Jim Widner, KB Homes Nevada president. He attributed the Pulte price reductions to "overaggressive pricing."

"The problem is not market-wide," agreed Dennis Smith, president of Home Builders Research, a regional real estate market databank. "It's builder-specific."

Still, Las Vegas area housing prices dropped in August after months of rapid increases, and more homes were staying on the market longer, Smith said.

"The bloom was off the boom about a month ago," said Monica Caruso, spokeswoman for the Southern Nevada Home Builders Association. She said she expected some of the other 100 builders in the region to also cut prices.

"Across the board, we are going to see prices fall in the Las Vegas area. But how far? No one knows," she said. "We still anticipate selling 28,000 new homes in this marketplace for the year. That would be a record."

The number of homes sold in August dropped 6 percent compared with July.

The median new home price of $259,700 in August also decreased from the month before. Still, that was up 26 percent from $206,167 in August 2003, Smith said.

Las Vegas-area existing home prices had increased 45.3 percent at midyear, from $165,135 in June 2003 to $240,000 in June 2004.

After news of Pulte's price cuts, other homebuilders with business in Vegas also closed lower Tuesday, including: KB Home, which fell $1.19 to $79.70; Lennar Corp., down 67 cents to $44.63; and D.R. Horton Inc., which dropped 69 cents to $30.22.

One Las Vegas area developer and investor called the Pulte move a market stabilization after a period of low interest rates and rapid building.

"I don't think anybody thought the superheated bubble we were in would last, nor that it was real," Jim Dunn said. "I'm going to use the word 'hysteria.' Everyone thought they weren't going to get a house."