Monday, December 27, 2004

Real estate bubble could explode in 2005

By Philip S. Moore-Inside Tucson Business

Champagne corks might not be the only thing popping at the start of the New Year, Tucson Metropolitan Chamber of Commerce said.

Along with revelry could come a burst of the real estate bubble enjoyed by the area over the past couple years.

Paula Stuht, director of economic development for the Tucson Metropolitan Chamber of Commerce, said while W the impact on Tucson may not be as severe as other places, such as southern California, it will be felt in flat or declining prices on homes and a drop in new home construction, which could affect businesses as diverse as appliance retailers and construction equipment vendors.

Lower interest rates have fueled a rise in residential sales, but has been matched by an even faster rise in the amount being financed, Suht said

"Home ownership has reached an all-time high (at about 70 percent) but affordability is losing ground, and that isn't a good sign," she said.

Playing into that, mortgage lending has been "fairly lenient" in extending credit for home purchases. "We may see the impact of that in future years," she said.

Although she said it is difficult to link the two, the November increase in personal bankruptsies after months of improvement might be an early warning of trouble ahead. She said over-optimistic appraisals, easy lending policies and rising personal debt levels could spell big trouble for the housing market if buyers discover they can't afford to make the payment and can't find a buyer willing or able to pay the price to assume the mortgage.

The University of Arizona's 2005-2006 Economic Outlook report, presented this month by the Eller College of Management, highlighted the consumer debt crisis, Stuht said.

"They talked about the lack of savings people have and how the personal debt ratio is going up very quickly. Given that situation, it's likely that more people will turn to bankruptcy as a solution," she said.

According to the latest report by the Tucson Divisional Office of the U.S. Bankruptcy Court, a total of 497 new cases were filed last November, more than 10 percent more than the 450 cases filed during the same period a year ago. The overall rise was fueled by a 12.4 percent rise in Chapter 7 personal bankruptcies, which jumped from 363 to 408.

While the November numbers were higher, it still doesn't indicate a trend, since the overall year-to-date numbers for 2004 continue to trail 2003 by 5.58 percent, with a total of 6,002 personal and business bankruptcies during the last 11 months. Chapter 7 personal bankruptcies are down 4.22 percent to 5019, and Chapter 13 personal reorganizations are off 12.36 percent to 943, and Tucson Division numbers continue to be better than the national average, which was down 2.6 percent during fiscal 2004, according to the Dec. 3 report by the Administrative Office of the U.S. Courts.

Between Oct. 1, 2003 and Sept. 30, 2004, non-business bankruptcies, including Chapter 7 and Chapter 11 filings, were down from 1.63 million to 1.58 million, across the nation. Business bankruptcies were also down, from 36,183 in fiscal 2003 to 34,817 in fiscal 2004, with Chapter 12 farm bankruptcies recording a 65.9 percent decline from 698 cases filed in fiscal 2003 to 238 in fiscal 2004.

Despite the improvement, Chapter 11 business reorganizations were up across the U.S. during the 2004 fiscal year, rising 2.2 percent from 10,144 to 10,368.

Quarterly bankruptcy totals have been declining, as compared to the previous year's count, for the last 12 consecutive months. But they remain higher than the comparable periods in fiscal 2002 and 2001, when a total of 1.55 and 1.44 million business and individual bankruptcies were recorded.

Even though there isn't enough evidence in the latest bankruptcy data to point to a trend, Stuht said there are indications that mortgage lenders are growing more cautious. She said real estate agents are noting that "they're not able to make deals they could have made before." Appraisals have become more conservative and approved amounts are less than the full value of the purchase.

"That's just a recent phenomenon," she said. It might be the rise in personal bankruptcies or it might be some other data, "but something has happened and lenders are getting more stringent."


At 4:32 AM, Blogger arcticblueice said...

Thank you for taking the time to place such important information on the web.
I have been trying to educate the public about the dangers of "artificial equity" that is trapping so many people.
Take care and God Bless,

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