Monday, December 11, 2006

'I Think We Hit a Price Wall'

From the Sacramento Business Journal:

Region's new-home construction takes biggest dive in state

New single-family home construction in the Sacramento area has plummeted 44 percent in the past year, the steepest new-housing downturn among the five major California regions. About 6,100 fewer single-family home construction permits were issued for Sacramento, El Dorado, Placer and Yolo counties through October compared to the first 10 months in 2005, according to the Construction Industry Research Board. The 44 percent drop is significantly larger than downturns in Southern California, the San Francisco Bay area, the San Joaquin Valley or the central coast.
...
John Schleimer, president of Market Perspectives of Roseville, said higher income levels in larger cities may have softened the impact there -- and hurt Sacramento. "I think we hit a price wall," he said of the four-county market. "Investors, who had been 17 to 20 percent of our homebuyers during our three-year frenzy, pulled out of the market. Another 20 percent of our population was priced out of a home."
...
And other areas have yet to feel the full brunt of a housing downturn, said consultant Greg Paquin, president of Folsom-based The Gregory Group. "We got hit first and hard," Paquin said. "The Central Valley will catch up. They started seeing the effects in the past six months."
...
Just how quickly will new housing rebound? Schleimer said the current slide will last another year to 18 months, the general consensus among analysts and homebuilders alike. They have been pointing to the region's economy, which has a low unemployment rate -- 3.9 percent in October -- and projected job growth.

14 comments:

JR said...

Two very important items from the last 10 days:

1) Sub prime lending is dying under its own weight, so all the "funny money" is over and the lying buyers and sellers are going to jail.

2) California had a net loss of 29,000 residents in 2005. This is infinitesimal to the population of 37 million, but a loss, none the less. No need for 10,000 homes.

The effect of those two items will exacerbate this housing correction more than anything else we have discussed in the last couple of months.

arizonadude said...

Where are all the new jobs in sacramento? They were real estate related for the most part. It has been a speculative mania up there for 4 years. Everyone freaks out when prices are off 10%. Wait till there off 30-40% due to foreclosures, speculators unloading and new home builders slashing prices to unload inventory.

paranoid renter said...

It has a low unemployment rate, but none of the people in the "new jobs being created" are going to be able to afford homes at their current price levels.

The only thing that can save this housing market are a constant trickle of people selling their homes in the Bay Area and relocating to this area, which may well happen.

patient renter said...

"They have been pointing to the region's economy, which has a low unemployment rate"

That's the only thing they ever point to. This is the very thing the pointed to when arguing that prices wouldn't drop at all! They were wrong already and they'll be wrong again!

Bakersfield Bubble said...

"Investors, who had been 17 to 20 percent of our homebuyers during our three-year frenzy, pulled out of the market. Another 20 percent of our population was priced out of a home."


___________________________

LIES! Specualtors (whether they were investors or end users) made up 50% of the market and they are gone. They will not return in 18 months either.


crispy&_______

Anonymous said...

I'm anxiously awaiting the Nov sales & price data for Sac, due next week, I think. Any guesses on yoy changes? More or less than the 5-6% price decline we saw last month? The central city zip codes I watch have been quite active - fewer listings, but quite a few pending sales. The overpriced listings are stagnant, of course. I also monitor the foreclosures for Sac. Preforeclosures have been trending down, but auctions have been trending up.

paranoid renter said...

Interesting article on Yahoo Finance
http://biz.yahoo.com/ap/061211/home_mortgages.html?.v=6.

Also interesting is that he singled-out California.

"There have started to be "early signs of credit distress" in financial institutions' holdings of so-called "subprime" mortgages, especially in California, Richard Brown, chief economist for the Federal Deposit Insurance Corp., said at the conference."

Max said...

I'm anxiously awaiting the Nov sales & price data for Sac, due next week, I think. Any guesses on yoy changes? More or less than the 5-6% price decline we saw last month?

You're probably looking at the same median price decline as last month. I would also hazard a guess that sales will be ~-25% yoy.

One important thing to keep in mind is the lower the number of transactions, the less important the median price is. What you want to focus on is average $/sqft or other comparable values.

sippn said...

Max, JR do you know who has a weekly sales volume number (sac re stats used to publish it)

median price may not drop as fast as you think because the good stuff is selling faster than the bad stuff, good stuff not as discounted as bad stuff. Rah Rah quality real estate!

Anyway, I've been thinking about my next souce of income and have been considering rental real estate. Is there anything with positeve cash flow out there?

Max said...

Is there anything with positeve cash flow out there?

Yeah, if you bought it 10 years ago.

Max, JR do you know who has a weekly sales volume number (sac re stats used to publish it)

I never published sales, only pending sales. The data became unreliable, so I stopped. I'll start publishing again when I find a better source.

median price may not drop as fast as you think because the good stuff is selling faster than the bad stuff, good stuff not as discounted as bad stuff.

The median becomes meaningless as you approach zero sales. For example: Five houses sell. Two for $1,000,000, two for $200,000, and one for $300,000. The median for those five is $300,000, even though 4 in 5 transactions weren't even close to that number.

Forget the median and look at $/sqft comps. If you're looking at rentals, you're better off buying in a place that has a high quality, transient population (college, appointed government staff etc) than simply a cheap property price.

Gwynster said...
This comment has been removed by the author.
Gwynster said...

Sippin'

I'd have to say no. I did a little looking around and I can rent a newly built home for .92 per sqft just outside of Davis. That same property sold for 3.38 per sqft last year. Needless to say I'm thinking about moving and enjoying the next 2 to 5 yrs. The old houses here don't stand a chance.

And I agree that you have to look at the price per sqft when judgung the market. Still too much over-priced crap out there (I think most of it is located in Davis).

JR said...

Sippin asks "anything with positive cash flow out there?"

I have been on the same journey. I have been finding deals in the smaller towns in Nor Cal like Oroville, Paradise, Redding, etc. that have multiple units. I can find prices at 10 times gross rents, so net a 6.5% ROI after expenses. It is possible with leverage to bump that up to 10%.

There is nothing in the SFR market in Sacramento that makes any sense yet. You would have to put 20% down and still have negative cash flow. It is a joke, since there will be no substantial price appreciation for 10 years. In 1995, you could find good deals that would "break even" with 20% down. That will come back, but not until the end of this current correction in 2010, and a price drop of 40% from the highs in 2005.

Anonymous said...

Why would anyone want to move to Sac from the Bay Area unless they are taking a promotion with the State?

The jobs up here are low paying without benefits in many cases.