Friday, November 17, 2006

"A Lesson in the Realities of California Real Estate"

From CNNMoney:

Like many other California renters in early 2005, Nick Basile and his fiancée, Jackie Neuffer, felt the pressure of ballooning home prices. The couple, fresh out of college, decided to act. They snapped up a house last summer in the San Joaquin Valley town of Visalia where prices had already spiked 40 percent in the prior 12 months. "We figured we better buy before things really got out of control," says Basile..."We decided it was now or never," says Basile.
The couple ended up spending $329,000, which they financed with an interest-only ARM with a home loan for the down payment. They knew their salaries would cover the monthly payments and they reasoned that if they ever got in trouble they could always sell - at a profit. What they didn't count on was that they soon began to miss their native East Coast. This past summer they decided to move back and they put the Visalia house on the market in August.
They first priced the house, a three-bed, two-bath 2,150 square foot contemporary, for $409,000. That price drew nothing more than a few chuckles from prospective buyers. One of the main problems was their builder was still churning out these homes and, to move inventory, he was undercutting Basile and Neuffer's (and every other seller's) price.
[T]hey kept dropping the price in $10,000 increments as they only attracted showed two showings in three months. They held an open house and nobody attended the first day and three couples came the second...

Then, a couple of weeks ago, they both got confirmations of job offers back in Saratoga Springs, New York. That added some urgency in their quest. They hired a real estate broker and lowered the price to $364,900, which, even if they get, will probably still leave them with a net loss after commission and other closing costs. Plus, they'll be out a total of about $10,000 in prepayment penalties for paying off their mortgage and home equity loan early.
Finally, last week, the agent showed the house four times, telling the couple that two of the buyers expressed interest. They're keeping their fingers crossed because they can't afford to keep up two households and don't want to be long-distance landlords.

Even if they rented the place, the numbers wouldn't add up. "Our payment is about $1,700 and we could only get about $1,500 for it," says Basile. That doesn't even take into account property management fees, taxes, lawn service and other expenses. They'd be awash in red ink every month.


Anonymous said...

How sad that the house only appreciated in value by $30K (10%) in one year. Every buyer deserves at least 25%/year and a bidding war for their precious stucco box as soon as they put it on the market. Anything short of that is an economic crisis.

rocklin renter said...

I don't care where you are from, if you spend more than 5 minutes in Visalia, you know damn good and well that 300k+ is an insane amount of money to spend on a SFR that does not come with acreage.

Even then I'd have serious pause for concern before dropping 300 large on anything in that area.

anonymous 1:18 --> LOL

cough drop brothers said...

That cracks me up: " we were afraid of getting left out ".
Oh geez! People are such lemmings.
They cant [ossibly consider buying a lot & building a house. Or maybe a fixer upper. Nope nope, gotta give in to peer pressure / follow the starbucks herd & buy a new one.
My ex was like that/as soon as her coworkers started buying houses thats all I heard about.
Uh yeah ,,, 8 years later I hear tell she has bad money problems w. her current husband who just happen to own a house in ...
here it comes ... TAMPA, FL !
Herd mentality keeps the upper class forever rich.
Now please excuse me while I bid $8,000 for a PS3 on EBay.

Anonymous said...

In the Central Valley it was the speculators and the surrounding panic buyers that would prop the YoY increases to the 30-40+% range. The town isn't that bad it is that there aren't a whole lot of 50K+ jobs. I often wondered how the paper could run an article that RE prices were up 30-40% and yet have an adjacent article about the Poverty rate/High drop out in this area..This bubble was just what it was a bubble..It will take years to work off this excess debt.

Anonymous said...

"They say California's a Garden of Eden, a Paradise to live in and see, but believe it or not you won't find it so hot, if you ain't got the doremi"

Tom Joad while packin up Ma Joad, Grandma, Uncle Will, Brothers Bill, Sam and Irus, Sisters Jane, Jill and a pregnant RoseaSharon (12)...

The Joads are movin back to Okiehoma! and sayin goodbye to the good Walmart Jobs and their stucco crapper in El Dorado Hils

Gwynster said...

It appears the Davis Equity Mafia haven't stopped UCD from going ahead with Village West. I'm sure they'll keep trying but in the meantime, here is the newest release-

Highlights from the release include:

"The faculty-staff housing component is a key reason for the project, with university officials saying West Village will be key to recruiting and retaining top talent and making them part of the university community."

"West Village will make this possible by adding to the Davis housing stock, and selling those homes at more affordable prices. The university's Office of Resource Management and Planning estimates that the homes will be priced about 30 percent below market price for similar homes in Davis".

"In the video, Pat Turner, former interim dean of the College of Letters and Science, said "the single biggest deterrent in attracting high-caliber faculty is the cost of housing."

"Staff is not immune, either. Police Chief Annette Spicuzza described "sticker shock" when she started looking, unsuccessfully, for a home in Davis. She ended up buying in Sacramento."

Merced Going Quickly said...

300K in Visalia!
I went to a house auction with a freind. From that day I could not understand why people were standing in line to pay for an overpriced McMansion. It was weird.

Cough Drop Bro.,
Please excuse me while I bid $8,001 for the PS3.

AnalysisGuy said...

Do you have any interest interest in a home price analysis for the Sacramento market? If so, I'd be willing to do it free of charge. Visit my site for details.

Dreamer said...

I need some help understanding how a mid-level professional working in Sacramento making $55,000 per year can afford to purchase a home in, or around Sacramento. I see the ads and the something for nothing promotions. What I just can’t get around though, regardless of how much I try, is the fact if I take one third of my gross pay, and apply a market rate of interest to a 15, or 30 year fixed rate loan (I will not do neg am, etc.). The present value of those terms and payments is on average $50,000 less than the price of a home in the worst neighborhoods. (The Hood) How do we rationalize, or explain those basic facts away? Please someone explain this to me. Use all of the charts and graphs that you need.

Anonymous said...


You have articulated one of the key reasons for the housing predicament ... and possibly the seeds of the bubble.

Those who bought at inflated prices over the last 2-1/2 years have to get washed out before equilibrium returns.

I live in El Dorado Hills (sac suburb) and follow the trends closely. I would say about 20%-25% of the homeowners here are stretched beyond their means and the only thing keeping them afloat has been price appreciation (which stopped late 2005).

Now the squeeze is on ... I reckon it'll be 2 years before normalcy returns.

Lander -- thanks to you for this great blog.

karl marx brothers said...


I see yer PS3 & raise you 2 Nintendo Wii's.

I'm plowing my real estate bubble profits in the game console hysteria ... er speculation .. I mean investment. yeah investment.
Thats the ticket.

(wonder if anyone is lined up to by the Wii? Word is it's a lot more fun and in a higher supply that PS3. I guess all those ques for new housing relases got me plenty of experience. Sterno anyone ? )

Dreamer said...

What many people fail to do is understand that all of the wiz, bang, nothing down, $1,200 per month payment promotions, on a $400,000 home, is nothing more than bait to get you out to the site. The math will not work, not a chance. But, just like on a car lot, you have to get people on the property to sell them a car. The difference is that, on the car lot, if the sum of your down payment plus your monthly payments does not equal the purchase price, you will not be taking that vehicle home. In addition, the finance company is going to require proof of income. Oh, wait I know what is coming……..But you get to deduct the interest. True, but you first have to be able to write the check before you take the deduction. And when the teaser rate expires, and the payment jumps say $400 per month, that means that you need to gross about $600 more per month to pull that off. How many people working in this area can look themselves in the mirror and say that in three to five years they will be making $600 more per month gross? I know that I can’t answer that question with a yes. Sorry for the rant.

Anonymous said...

I think nominal home prices will drop another 10 percent over the next couple of years here in Sacto, stay flat for 3 to 4 years (thus continuing to fall in real terms), then begin to gradually increase again.

Soft landing, in other words. The precipitous drop in prices that some people expect is simply not going to happen, imho.

There's a good chance mortgage rates will move sideways or downward; little or nothing will be done to tighten underwriting standards; and the mania about housing still remains relatively strong, despite widespread media reporting about the bubble.

Plus, the population projections for Cali are staggering. We will require 200-250k new housing units each year over the next 20 years just to house the new people.

Note: I am not trying to be a housing cheerleader, that's just how I see it.

Anonymous said...

anon 7:25 pm.

You are being a cheerleader, and have no basis in fact to base your opinions.

First of all, on population increase. The Bay Area population in actually going down. Another reason people were coming into the Central Valley was because of CHEAP HOUSING.

You have a lot of people who purchased homes that they cannot afford and their payments can slowly double. And they will have to sell or foreclose.

Plus, see the statistics, there was/is about 30% more housing built than was required, and this is not included in the calculations.

This was not just a price bubble, but also a quantity bubble. There are more homes than people to fill them

Anonymous said...

To Anonymous at 7:25:

My main point, which I didn't emphasize very well, is that real estate prices tend to correct in real terms rather than nominal terms.

Let's say that nominal prices eventually go down 20 percent from their high of about a year ago, and that it takes another 2 years for this to play out. Then, let's say that prices are flat for another 3 years.

Under this scenario, real prices would have fallen about 40 percent over the 6-year period (20% nominal decline plus 6 x 3% [est. annual inflation rate] due to inflation = 38%).

It's real prices that matter, and I don't think we'll see a real decline of more than 40 percent.

We won't see a precipitous drop in nominal prices; the correction will come from a combination of moderate nominal decline and inflation.