Thursday, March 30, 2006

Where Everybody Knows Your Name...and the Mayor Wants to Sell You a House

Looks like Merced's housing piggy bank is cracked. Last week, the LA Times published a brutally honest piece on Merced's housing bust. Definitely worth the read. Now, the local paper, the Merced Sun-Star, has some local reaction to the article. Looks like everybody in Merced is a real estate agent, including most of the politicians!

Local experts agree with dreary housing article

Real estate is a driving force in Merced's economy. Five of seven members of the City Council draw their livelihoods from it -- four are licensed to sell homes, including the mayor.

It's little wonder that an in-depth Los Angeles Times article spotlighting the city's rapidly cooling housing market has made the rounds. "I think half the town has read it," said Mayor Ellie Wooten, a veteran real estate broker with Century 21 Salvadori Realty in Merced. The article follows the city's real estate market from the heady days of the past few years to the grinding slog of today.

"It's changed rapidly," said Wooten. "It boils down to supply and demand, and right now apparently we have an oversupply." Wooten said prices are "eking down" but she doesn't expect housing prices to collapse soon...The throngs of investors from the Bay Area and Los Angeles have thinned, she said...

While many newly opened subdivisions sit empty, developers in Merced have 7,000 new houses in the works. Hundreds are expected to go on the market this spring...

Councilwoman Michele Gabriault-Acosta said about 200 resale homes were on the market when she got her license to sell homes in July. The number has since grown to more than 600. "Everybody was trying to jump on the bandwagon and make a big profit," she said. "Now it's a buyer's market, last summer it was a seller's market."

Councilman Carl Pollard, who got his license to sell homes in August 2004, said the days of multiple offers above asking price are definitely gone. He said $30,000 and $40,000 breaks on homes are not uncommon. "Sellers are giving concessions, but if you look at the market, they're still not moving property," he said.
Don't forget to look up at the banner ad. You might see Mayor Ellie Wooten's real estate ad: "It makes sense! In today's housing market to rely on an experienced realtor."

And in nearby Atwater, Mayor Rudy Trevino, who also is "in the real estate business," comments on a halted new-home project and the local housing market.
The housing market has cooled in the years since Florsheim first proposed building Atwater Ranch, noted Trevino. "One of the things that hasn't been taken into account is the fact that the market has changed considerably since this whole thing started," said Trevino, who is in the real estate business. "It raises the question of how viable a project of this size is now."
Here are some excerpts from the LA Times article:
The good times have already ended here, in the same way slamming into a wall reduces your speed. A house will fetch 20% less today than it did last summer, brokers say, assuming it finds a buyer at all..."It's like everyone got together and said, 'Let's not buy for a while,' " Gregory says...

Just a little while ago, Merced was an investor's dream. The Office of Federal Housing Enterprise Oversight reported this month that prices in the city and surrounding area increased 31% in 2005. The housing agency ranked Merced first in price appreciation in California and ninth in the nation.

That already feels like ancient history, an era when agents would list a property and within hours people would be madly bidding against one another. In five years, Gregory never had a listing that lasted longer than four days...

The phenomenon occurred throughout the Central Valley. According to the Housing Enterprise Oversight numbers, the leading edge of the nation's real estate mania was not San Francisco or Manhattan or Miami, no matter how giddy those markets seemed to their residents, but in some little-known agricultural communities.

The housing agency's No. 1 U.S. city for price appreciation over the last five years was Madera, an old logging town northwest of Fresno that rose 144%. Yuba City, north of Sacramento, was second. Third place went to a Florida city, Port St. Lucie. Fresno and Merced, both at 142%, rounded out the top five.

Andrew Leventis, a Housing Enterprise Oversight economist, contemplated this ascending arc in a region that is not a tourist destination or retirement haven, where incomes are not growing and unemployment is perpetually high. He then used an un-economist word: "Shocking." "It's difficult to know what was driving these high rates of appreciation," Leventis said.

To people in Merced, however, there's little mystery. This was a classic bubble, where people paid increasingly higher prices because they were sure that someone would come along and pay even more. Economists call this the "greater fool" theory...

Officially, this city of 77,000 has 640 homes for sale, about 10 times as many as last summer. But agents say that if you add homes for sale by their owners, new homes being sold by builders and the dwellings that would-be sellers have pulled off the market in despair -- none of which are in the agents' centralized database -- the real number is at least twice that. The Merced Sun-Star's Sunday real estate supplement has 40 pages of ads.

Many of those ads are for new developments. The city lists 47 active subdivisions where 7,173 homes are going up. For builders with excess inventory, it's let's-make-a-deal time. At the sales office of Shadow Creek, whose prices range up to $523,000, signs on the front door and walls proclaimed: "Ask us how to save $40,000 off a new home!!!" "If you want to ask for more, just do it," the saleswoman advised. She said a $60,000 break would probably be fine.

Over at Summer Creek, the saleswoman offered a $75,000 discount, subject to a few restrictions, like using a preferred lender. There was also a $3,000 referral fee available -- talk a friend into buying there, and the money's yours.

Ryan Burchard, a San Luis Obispo radio host, examined one of Summer Creek's model homes with his two daughters. "Some of these salespeople seem a little jumpy, a little desperate," he said. "It's like walking onto a used-car lot." Burchard might be moving here this summer, but he felt no urgency to buy. "Every other house here is for rent," he said. This is a very good time to be a renter in Merced. A new $450,000 house, owned by an investor waiting to flip it -- or sell for a quick profit -- can be had for less than $1,000 a month. That's a silver lining for locals who missed out on the boom...

If the overextended are vulnerable, the investors are at least disappointed. Liubo Hong, a Silicon Valley engineer, bought a four-bedroom on University Drive in February 2005 for $312,000. He's been trying to sell it since October for $389,500. In the late '90s, Hong said, "I got caught up in the stock market. I got in near the peak. I wish I had gotten in earlier." He's trying to rectify that mistake with real estate. "The market may get better in the spring," the engineer said with hope in his voice. "Or next year. Or in three to five years." The leaflet for Hong's home calls it "ideal for investors." But he's receiving only $925 a month in rent, less than his mortgage, and Merced is running low on fools.
Before the Boom:
Before the escalation began, 8 out of 10 home buyers in Merced County got a safe, fixed-rate loan, according to research firm DataQuick Information Systems. As the boom proceeded, interest rates fell, which should have increased the appeal of fixed-rate loans.
During the Boom:
Instead, buyers switched to adjustables, which saved them money in the short term at the cost of a riskier future. By last summer, 80% of buyers in Merced got adjustable-rate loans...

The number of agents registered to sell in Merced went from 200 to 1,200 as property prospered...

When houses rise in value, households are, at least on paper, worth more, giving them a cushion in bad times. But many homeowners have been treating that equity as if it were income and spending it. In Merced, they would go down to the car dealers even before their refinancing cash-out check came through.
After the Boom:
The only thing worse than the real estate market here is the market for real estate agents. They've been coming down to the Auto Toyz and Auto Store used-car lots looking for work. "Everyone who applied recently, about eight people, they all were Realtors," said Nico Pineda, who until recently was hiring manager for both lots. "But things were slow for us, so we had to turn them down."
In come the waves...


Athena said...

Well at least the people in Merced are talking about it... and reporting on it. In my local paper... sheesh... the silence is a big fat elephant in the center of town. The online edition of the paper is all real estate add supported and there is not a peep out of them.

Anonymous said...

"A house will fetch 20% less today than it did last summer, brokers say, assuming it finds a buyer at all.."

Finally, the truth is slowly creeping out. I love this article.


Rob Dawg said...

Five of seven members of the [Merced] City Council draw their livelihoods from [Real estate].

WTF? And just how do they get around the conflict of interest issues? Everytime a housing development appeal comes up they must recuse themselves by California Law.

ocrenter said...

Ha, and can you imagine when the mayor and his friends got first dip on the news that UC Merced was a sure thing. probably bought up half of the town at that point.

Anonymous said...

"And just how do they get around the conflict of interest issues? Everytime a housing development appeal comes up they must recuse themselves by California Law"

What conflict of interest? Do you think that there is a conflict just by their being realtors even if they're not involved in the project? What California law?


Anonymous said...

The local county commisioner here is converting a farm field into a housing subdivision. Just like his developer did next to it. The houses are small, the development crowded. The two lane road that goes into town is now clogged. Around here we call county commisioners "road commisioners" because they are the ones who decide where the roads will be widened or repaved.

Now the developing road commisioner wants to shut down the 40 year old, very popular drag strip that is next to "his" development. That so he can sell lots for a higher price. So much for the old rule 'who was there first". A real conflict in interest and ethics.

What makes the matter more of a conflict