Friday, December 01, 2006

Sacramento Housing Market Water Cooler - December 2006

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130 comments:

AgentBubble said...

Another report on the asbestos situation in El Dorado Hills....

http://www.sacbee.com/101/story/95583.html

HighSierraGuy said...

How about this Pearl in today's Business Section????

Soaring Loan Defaults Forecast

http://www.tiny.cc/Lsbz1

sippn said...

REad teh fine print...

"However, DataQuick Information Systems analyst John Karevoll and other real estate experts say rising subprime foreclosures are likely to affect housing values in a limited number of neighborhoods, rather than in the region as a whole"

Anonymous said...

2.2 million Americans could lose their homes to foreclosure

http://sfgate.com/cgi-bin/
article.cgi?f=/c/a/2006/12/20/
BUGK2N2M011.DTL

Anonymous said...

Hey Sippin,

All I know is that foreclosure shxx is hitting the fan and that is going to cause big problems.


Domino's are falling faster now.

Housing doom 2007

Perfect Storm

Lander said...

Posted below.

Anonymous said...

when can I buy into a John Saca Condo?

I have my shopping cart all packed and am ready to party with Saca!

I don't need much, in fact I don't need nothin at all,

I gets my food from Loaves and Fishes, smokes I bum, and I don't drink much except fortified Vino but it's better cold, so can I get a small refrigerator with my John Saca Condo?

waiting 2 buy said...

What expected price per sq. foot would you consider realistic in the following areas:

Elk Grove
West Sac
North Natomas

MarkJ said...

We almost pulled the trigger on a house at $266 a square foot in El Dorado Hills. Backed out at the last minute about 7 months ago. We sold our house for $256 a square foot in Elk Grove in May. I'd be happy with $175-200 a square foot for a custom home (not some cracker box tract home where I can jump from roof to roof).

Gwynster said...

I based my "buy" on $110 a sqft. I'd go $90 sq ft in EG because I'd only buy a future rental there. In Natomas, $90 again because flood ins. is never cheap and if you don't buy it, you are a fool. Natomas is our new 9th ward.

Try the rent/buy calculator at CEPR for a few senarios.

Anonymous said...

You will never see $90 a square foot in Elk Grove or Natomas. We paid $101 a square foot in 1992 in Elk Grove. Those days are long gone.

At present, the lowest price in Elk Grove is $136.92 a square foot (a short sale) and it's $164.96 in Natomas (I'm assuming you don't mean the ghetto areas near Del Paso).

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

Hey Anon,

I watched a gorgeous 2 story 2200 sqft craftsman sell for 139k in 1996 just south of Poverty Ridge. I'm a patient woman.

In the meantime, I can always let someone else take the risk and wait for the foreclosures... it's all good.

Anonymous said...

Just my opinion Gwynster, nothing personal. I would be delighted to have it go that low, but I just don't see it happening.

Anonymous said...

$90 per sq. foot? When are you gonna wake up from your dream?! Get realistic.

$170 - $180 per sq. foot is a good deal. anything below would be foolish to pass up.

lander -

don't quote me on this when i find myself dead wrong in '07!

patient renter said...

The CEPR rent/buy calculator is excellent, but it leaves out a few factors and also assumes a certain rent price, which it doesn't allow you to adjust. I did my own rent/buy calculation based on the CEPR rent calculator and came up with the following:


Breakdown of the cost of owning a $400,000 home versus renting an equivelant home for $1350 (about equal in today's rental/sale market).
Assumes home is purchased with a 30 year fixed mortgage with a 6.36% interest rate and a down payment of $20,000 is made
Home appreciation calculated at 3.5% annual.
Principal paid calculations based on breakdown using amortization calculator.
Taxes calculated based on standard deduction and 25% tax bracket.

Rental Costs:
Monthly Rent - $1,350
Security Deposit - $2,000
5 Year Cost of Renting - $83,000
10 Year Cost of Renting - $164,000


Cost of Owning:
Down Payment - $20,000
Closing Costs - $16,000
Monthly Mortgage Payment - $2,366.99

5 Year Breakdown:
Mortgage Payments - $142,019
Taxes - $9,400
Maintenance and Insurance - $18,800
Total Cost - $206,219
Home Appreciation - $64,734
Principal Paid - $24,857

10 Year Breakdown:
Mortgage Payments - $284,039
Taxes - $17,800
Maintenance and Insurance - $35,500
Total Cost - $373,339
Home Appreciation - $139,944
Principal Paid - $58,991


Summary:

Rent vs. Own Savings = Cost of Owning - Cost of Renting - Amount payed towards principal - Home appreciation

5 Years:
$206,219 - $83,000 - $24,857 - $64,734 = $33,628 savings if renting

10 Years:
$373,339 - $164,000 - $58,991 - $139,994 = $10,354 savings if renting

Anonymous said...

Great calculation...Only issue I see is that taxes were only about 1/2%, and should be a tad over 1% of the purchase price. That would make your taxes closer to $20,000 over 5 years instead of $9,400...

Anonymous said...

patient renter,

does the calculator account for rental price increases? here in the south bay rental has gone up $200 per month on a 2/1 apartment. they raised me rent after 1 year from $1500/month to $1700/month. of course i left and found a lower quality apartment for $1600/month.

i wonder in the span of 5 or 10 years what the numbers look like given an average $100/month per year increase vs. a mortage that is fixed albeit insurance + maintenance costs may fluctuate.

patient renter said...

Anon: good observation.

I forgot to mention, I'd appreciate any feedback on my calculation/scenario.

The general observation I drew from my calculation was that in a market where rents and mortgages are so out of whack such as in Sac ($400,000 house can rent for $1350) you're much better off, and safer, renting unless the property is undergoing drastic short term appreciation. That isn't happening and doesn't look like it will happen for some time, so until rents go up a lot, home values come down a lot, or appreciation skyrockets again, renting is definately the way to go. Not only will it save you a lot of money (see the calculation), but it will prevent you from getting burned in a depreciating market.

patient renter said...

anon 2:23: Rent increases was the one thing I thought of that I didn't account for. I wasn't sure the best way to do it... Where I live in the Sacramento area, rent increases have been fairly negligible for the past 5 years that I've been renting and probably wouldn't effect the calculations too much, but it would still be a good thing to take into account somehow.

Sippn on my own porch said...

Pretty close with some corrections. So folks, at what price do you allow a landlord to run your life?

The guy parking on the lawn next door, does he rent, own or squat?

The neighborhood my kids run around in and play, I'd prefer that my neighbors have made some committment and own their property, the occasional renter is fine.

If I decide to build a bbq in the back yard or a playhouse, I will.

And when I put up xmas lights, I leave up the hooks for next year.

Seasons Greetings!

Sidelined with Popcorn said...

We can not see the bottom of this market yet. The light at the end of the long tunnel is the foreclosure train, carrying tons and tons of freight. Check out these comments, buried in the CRL report on sub prime lending:

‘While one in five households with subprime loans originated in 2005 and 2006 are projected to foreclose, other families who took out these loans and then refinanced into subsequent subprime loans also will experience foreclosure. Using the best information available, we estimate that one-third of families who received a subprime loan in 2005 and 2006 will ultimately lose their homes.
Our estimated 19.4 percent foreclosure rate for subprime loans originated in 2005 and 2006 is in and of itself disconcerting, but it actually represents only the likelihood that one specific subprime loan will end in foreclosure, not the cumulative foreclosure rate for an individual borrower or household who took out that initial loan. While more research is needed, one study based on a survey of thousands of borrowers found that 60 percent of subprime borrowers do not “move up” into a prime loan when refinancing, but instead get another subprime loan.’
- Center for Responsible Lending

So it is 30% of ALL subprime loans will foreclose, when you include the refi’s back into subprimes. The 19.4% is for only newly originated acquisition sub primes in 05-06

Choooo Woooo.....chug,chug,chug...

Anonymous said...

Rent Vs. Calc.

Two things I think repairs and maintenace would be much higher on the 10 year.

Also, need to add 5% int rate on money saved by renting.

Max said...

I forgot to mention, I'd appreciate any feedback on my calculation/scenario.

does the calculator account for rental price increases?

I think PR has it about right. You could also throw in the compound interest on the savings (~4% APR today), which is greater than the appreciation rate you're using. ATMC, after five years of saving $1000 per month at 4%, you're looking at $6,500 in earned interest. After 10 years that jumps to almost $28,000.

More than enough to offset rent increases...

RMB said...

Now run the same calculation with 0 or neg appreciation and see what the result is.

That appreciation number is usually the kicker in most of these calcs. I heard that people were using 22% annual appreciation to value properties in SoCal and were coming up with astronomical values. Where they at now?

Max said...

Put another way, $400,000 invested at 4% with $1,300 monthly withdrawals for 10 years would leave you with $404,000.

In other words, you can live for free (in dollar terms), if you have a $400,000 lump sum. Kind of a "sell and rent vs own" calculator.

Anonymous said...

here's a calculator i've used in the past that always convinces me that owning is better.

https://www.eloan.com/s/show/calc_rentvsown


can anybody spot the flaw in the calculator :)

paranoid renter said...

>>>>>>
Put another way, $400,000 invested at 4% with $1,300 monthly withdrawals for 10 years would leave you with $404,000.

In other words, you can live for free (in dollar terms), if you have a $400,000 lump sum. Kind of a "sell and rent vs own" calculator.
>>>>>>>>

This is true iff
1. you can ensure you get at least 4% during all of those 10 years.
2. you can live within $1300 (all expenses) after paying taxes on the $1300...that's grad student stipend territory.
It's not impossible but it's hard.

sippn said...

aitytiMax is there a guaranteed 4% investment vehicle?

The e loan calculator does not show you that your potential appreciation on the personal residence could be tax free, boosting its rate of return.

At 1.5% appreciation annually averaged over 10 years is about a wash with renting.

So all you folks are looking for the cheapest home per foot out there - bad investment move. Theres a reason its the cheapest. Find the best, best location, decent home, make an agressive offer. Thats the better home to invest and live in.

Anonymous said...

Hey Sippin,

There are CD's at 5.25%.

Perfect Storm

Gwynster said...

Sippn,

Plenty of options for CDs if Money Markets make you nervous.
http://personal.fidelity.com/global/search/inquira/resultsindex.shtml?question=CD

Max said...

2. you can live within $1300 (all expenses) after paying taxes on the $1300...that's grad student stipend territory.
It's not impossible but it's hard.


I used $1300 as the rent comparison value. Obviously you would still need money to buy food etc.

I assume a job would be necessary for both scenarios... :)

Max said...

Max is there a guaranteed 4% investment vehicle?

About as guaranteed as any housing appreciation. I think 4% is historically conservative for a CD/MM account.

Back in the day (pre 1998) interest paid on savings was closely tied to mortgage interest rates. You have to figure that after this period of financial "innovation" is over, that relationship will return.

And you'll get way more than 4%.

Anonymous said...

Re: rent vs. buy calculator

What about the cost of moving? If you're renting, you might lose your security deposit, but as soon as you buy, you're on the hook for 6% of the sales price for realtors.

RMB said...

Anon 4:57

Appreciation is on the high side and the tax benefit is overstated. More and more people are being hit with the AMT which eliminates the home mortgage deduction. Run it with 2% app and it makes sense to rent. If there was a section to eliminate the deduction it would make even more sense.

Gwynster said...

Patient,

Now that I've seen the eloan utility, I like it better. It lets you make the judgement call on the current value/appreciation vs their assumptions (which nonetheless, I still agree with).

The other thing I like about it is that it gives you amount spent over the life of the loan. Check out how much you pay in 30 yrs - wow. I know there are all sorts of factors in like tax breaks, possible periods of rapid appreciation, ROI etc., but I still can't think of a better motivator for me to continue renting and save for a bigger down in a market like this.

sippn said...

6 months CD's 2002-2004 were less than 2%, didn't exceed 5% until 9/2005.

Never been hit yet with AMT but I might have to vote Democrat for this: "Democratic leaders this week vowed to make the alternative minimum tax a centerpiece of next year's budget debate" ... Wash Post 11/11/6

Things change.

patient renter said...

Gwyn: I'm liking the eLoan calculator too. It's the same sort of calculation I was doing with some added variables.

Anon 4:57: I'm not seeing anything wrong with the eLoan calculator so far. What am I missing?

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

Great comments guys. A few comments: I agree, no way will we see below $100 sq.ft. in this region, at least in the "better" places like Placer Co. There is inherent(sic) value with land, and that doesn't move much either way. I heard builders were paying $300K per lot for the newer communites in Roseville/Rocklin. Now how do you expect less than $100/sq when your fixed cost just for the land, no improvements, is $300k? I'm not saying that the builders won't take a loss, but don't expect a 2000 sq.ft home to go for $200K. No way! I see too many people out getting the ichy trigger finger trying to buy a home now, while prices are still too high. Too many SHEEP!!
As for the debate of rent v. buy scenario, I'm seeing condos now well below the $200K mark. So if I can get a condo for about $800/month for P/I before tax deduction, doesn't it make more sense to own than rent, esp when rents are higher than $800? Let's leave so. Sac out of the debate on this one :) Thanks!

Anonymous said...

Anon 5:39, $200,000 will run you at least $1200/month, plus $200 in taxes, $50 in insurance, and $100 in HOA. If it rents for $800/mon, and will sell for $150,000 in a year, renting is a much better choice. In fact, it is a no brainer. There will be no appreciation in Sacramento for 10 years...until 2015.

Gwynster said...

Right now I'm tracking listing for brand new homes renting (or should I say not renting) for $60 to $45 per sqft. There is a whole lot of bleeding left to go.

My weirdest event of the week? A realtor trying to talk me into renting from a client of hers instead of buying because it's not a good time to buy.... that was a chin-dropper.

Anonymous said...

Another thing that makes renting better than buying is if a person switches jobs, they can just switch homes in 30 days in a lot of cases to be closer to their new job. If you own a home the cost of selling may not be worth it, especially in market like this.

So if you own and switch jobs you can tack on the cost of car depreciation, due to increase mileage and larger fuel consumption.

West Sac down 26%. In just one year. Dang

Housing Doom 2007

Perfect Storm

Gimme a Break said...

anon 6:21

There will be no appreciation in Sacramento for 10 years...until 2015.

who's the idiot that is making those kinds of claims? yes there is price depreciation, but a blanket statement condemning sacramento to have NO APPRECIATION UNTIL 2015!

Anonymous said...

Gimme,

Once again: there will be no appreciation in real estate in Sacramento until 2015. 10-years from the down turn. It is not a bold prediction, because it simply repeats what happened in 1990.....the recovery took 10-years, 1999, for prices to recover to their levels of 1990.

And the "idiot" making that prediction would be Business Week, December 25th issue, page 114. Business week predicts several markets will not achieve the 2005 prices for another "15 years or more".

That is why no one will buy rentals with negative cash flow in Sacramento. The only return on your investment will be cash flow, because THERE WILL BE NO APPRECIATION IN SACRAMENTO UNTIL 2015. The market will be very flat for a long long time, and at this point in the cycle is still declining and a couple of years away from the bottom.

Of course you could say it "will be different this time"....but I would have to say "Gimme a Break".

Max said...

Anybody notice that the "Flip-This" blog has been hijacked? I know the owner doesn't post that often, so they might not know. All the old posts have been deleted and all that's left is a redirect.

If anybody can touch with the owner, they might want to let him/her know.

gimme a break said...

anon 4:59 -

business week also said that 2007 may not be all that bad and that 2009 is the predicted comeback year.

http://www.businessweek.com/bwdaily/dnflash/content/dec2006/db20061211_510835.htm

Article title: How Bad Will the 2007 Property Market Be?
Author: Maya Roney
Date: Dec 12, 2006

hmm.. could businessweek be back-peddling?

Anonymous said...

Gimme,

Sure, they could be back-peddling. According to your comments, they are "idiots".....

Gwynster said...

Hmmmm nothing like a little "fire" sale - great time of the year for it if that's what is happening.

**passes the tinfoil**

Blazes inflict holiday misery
11 families homeless after rash of fires in the capital region
http://www.sacbee.com/101/story/96709.html

Max said...

Hmmmm nothing like a little "fire" sale

I've always wondered about that myself. Do arson rates increase when the housing market tanks?

I wonder if there's any data on this...

HappyinSF said...

RE: Fires
Whoa, 12 people living in a house in Oak Park..

Jeff said...

Back to the rent v. own calculations, right now, and in the forseeable future, builders are covering closing costs so that $16K figure can be removed from the ownership calculation. Some will even pay mello/roos and/or property taxes for 2 years.

gimme a break said...

jeff -

can you cite examples of builders covering such expenses?

gimme a break said...

anon -

you're right since I called business week "idiots", i cannot cite their data to prove my point. however, everything is speculation for future projections that are wild such as "no appreciation until 2015."

Yes there has been a 23% decline in Sacramento county, that is fact by the numbers. However there is no gaurantee nor can anybody make blanket statements that there is going to be no appreciation until 2015 is ludicrous.

Certain neighborhoods and subdivisions will not experience "no appreciation until 2015." That kind of talk is nothing but hype to ward off would-be buyers.

Anonymous said...

The anti real estate hype is just as bad as the pro real estate hype. I think we should all try to help each other get a true perspective of the real estate market and tone down the rhetoric.

Anonymous said...

Gimme,

How about we agree on this statement? The price of real estate in Sacramento started declining in June of 1990. It did not get back to the same nominal price level, until August of 1999. It did not get back to the same inflation adjusted price level until early 2001.

Those are the facts. You may draw your own conlusions about the current downturn starting June 2005.

sam said...

anybody find out about my new John Saca condo? Is it ready yet, and if not, next week or so?

I'm gettin pretty tired of living under this shopping cart, although I do have a plenty good roof made of cardboard with some saran wrap for waterproofing...

if you find out, please give me a ring, or come down to loaves and fishes and ask for Sam

gimme a break said...

sam -

you're not funny.

Sidelined w Popcorn said...

Gimme,

Mike just bought a home in a JTS community. Price was disounted "$200,000" (according to JTS) and they gave him $10,000 for closing costs, $13,423 for the first 6 months interest and $5,000 in back yard landscaping.

Anonymous said...

Wall Streeters aren't having any trouble with today's housing prices:

http://www.sfgate.com/cgi-
bin/article.cgi?
f=/g/a/2006/12/22/carollloyd.DTL

head attached said...

There are NO underlying reasons for the price increases we've seen:
-not wages
-not prospects for job growth
-and the levees: the situation is insane.

Sacto is just not that fabulous a place to live in. There's crime. The school are a problem. These fundamental issues are not being addressed and will not be.
The current prices need to come down by at least half to reflect the actual value of the community and the actual means of the people living within it.
People like me will wait a limited amount of time for this correction to happen. If it does not, people like me will leave.

Sam said...

do you think John Saca or his Dad have any used Refrigerators that I could live in until he gets my 33rd floor Condo ready?

When I move into my John Saca Condo I plan to have a big party for all my friends, that includes all of you, my friends at Loaves and Fishes, John Saca, Heather Fargo and all of her planners and helpers...

I am going to supply all the fortified wine you can drink!

So be on the lookout for announcements of this exciting downtown urban party, just as soon as I move from shopping cart to my jim dandy new John Saca Condo

sippn said...

Gimme..

Hang in there. We're not all just quarterbacking from our pickup truck out on the lawn w/ Bud in hand.

Head attached said...
"The school are a problem. "

For you, I agree. Please go elsewhere.

Home prices did not drop 24% just as they didn't rise 15-20% in my neighborhood as the stats say - its Pintos vs Hummers.

We may not see appreciation for awhile in the "average median price" but that lumps in all the fabulous residential properties with the repos, teardowns, park on the lawns...get it?

Early 90s included base closures and Iraq I, still saw 100-200% appreciation in some properties - better than renting.

Put your money in CDs or the stock market, did you forget 1.2% CD's? and the dot com bust?

Its all some risk, but what do you know best?

gimme a break said...

head attached -

most bay area folks are driving prices, or sustaining prices rather. yes you are right the disparity between house prices and local sac jobs are completely abnormal and due to pop.

but the wild card in my mind is the bay area folk who want to "keep hope alive" and relocate to the 916.

i'm not a financial expert nor real estate wizard, but reading enough of the diatribe between pro and anti sac real estate, it seems that the market will not crash as some expect (for some of you - hope to crash).

anon - to answer your question there's a variety of variables in play today that were absent in the early 90's. the bay area job market wasn't as strong, the flippers + status seeking people running on credit fumes running up prices, and also MSM (main stream media) is much more of a factor today. real estate to me is not purely based on financial data or projections but in large part cultural and psychological. the latter is fed by MSM feeding our emotions. think about it. how in the world would people buy into the esoteric mortgages, sub-prime loans and its ilk?!!

so that's my 2 cents of how I see things.. nothing is new under the sun. common sense and discernment are good friends to have in making any decision.

gimme a break said...

merry christmas all! hope to read up on your forecasts and reactions to how 2007 opens up!

paranoid renter said...

Gimme,

I agree with your analysis. As long as employment in the Bay Area is strong, they will keep prices in Sac up. People are sitting on tons of cash and will grab these houses if they fall another 10% or so.

Jeff said...

-gimme, pretty much all of the major builders i'm looking at will cover closing costs, e.g. dr horton, lennar, jts, centex, william lyon, etc.
also, another interesting mix for the rent v. own calculation: new tax bill allowing pmi to be deducted. http://money.cnn.com/2006/12/20/real_estate/tax_deductible_mortgage_insurance/index.htm?postversion=2006122012
Any to whoever said we're all hyping either for or against RE is wrong, just giving evidence and observations to those who are interested.

Jeff said...

a half million for a lot. unreal.
http://sacramento.craigslist.org/rfs/252794732.html

Anonymous said...

Parnoid Renter.

Now who exactly is sitting on tons of cash? Are you talking about the 30% of this Country who do not own a home. Maybe you are talking about some more Bay Area investors who want to buy home in Sacramento and rent it out for negative cash flow.

Perfect Storm

paranoid renter said...

Perfect Storm,

Indeed, I'm talking about the tons of people in the Bay Area who will sell their homes and move to Sacramento when the price differential increases again. Dynamics in the Bay Area are different so there's always new home buyers. These days 2 or 3 friends are pooling together their income to buy their first house so the prices will continue to remain high there as long as the tech economy holds up.

Anonymous said...

I doubt it.

Perfect Storm

Anonymous said...

Ok so you have Bay Area people who will move to Sacramento once the price differential increases again. This is all due to the a good tech job market in the Bay. So what we have is a people driving back and forth from Sacramento to the Bay.

Do you know how many people do this now? I hear about these people all the time, but have never met one. Im just curious I wish someone would do a study.

I would never do it, but then I have never had a problem finding a good job here in Sacramento.

So how much does this price differential have to be? 200K, 300K. Where would they want to live in the Sacramento area. El Dorado Hill, Roseville, or maybe some place closer to the Bay like Davis.

I know people who already commute from Roseville and El Dorado Hills to Sacramento and they think that sucks. Now the City of Davis would be better for them, but homes seem to be better position in Davis than the rest of Sacramento and would not be that great of a bargain for someone from the Bay. Maybe Woodalnd or better yet Vacaville.

So lets talk about the commute. Some people must like it. What happens if we go to $4.00 a gallon gasoline or even $5.00 a gallon.

I think all the Bay Area's people who bought in Sacramento before were people trying to capitalize on the ever escalating real estate prices here in Sacramento that was due in large part by easy credit to people who really should not have bought a house and for some they made money and for others they are listed on Max's flippers in trouble web page.

Sacramento is losing lots of educated people to other states and they are being replaced by uneducated foreign immigrants.


Sub-prime going the way of the Savings and Loan, major fraud is being uncovered in the sub prime mortgage insustry, Congressional hearings in 2008. We are on track for a 50% decline by 2009.

Housing Doom 2007

Perfect Storm

Anonymous said...

Oh I just realized how the housing market is going to get better. There is going to be a thing called the Spring Rebound in 2007. It will be great. Eveybody who wants to sell put your houses on the market, everything is going to be ok, due to the Spring Rebound in 2007.

Perfect Storm

Anonymous said...

Couldn't imagine anymore bay area transplants/commuters in the future. There are already a bunch of them now. I have an early shift in Vacaville and commute down from Davis around 5am. It's like NYC to me with all those westbound cars/suvs in the wee hour of the morning. East bound? Pretty dead. Tolls are going up to $4. That's $8 a RT for Sac-SF commuters starting Jan 1. Not to mention gas is starting to creep back up again. And all those families that are "chipping in" to buy homes to build equity? Well, when they realize they need to live together longer than they had intended because their "investment" didn't return 10% over the 3 years, someone is going to want out.

Jeff said...

I work for a software company and used to have to go to the bay area often until I convinced mgmt that I could work in Roseville instead. I have several collegues and friends who commute daily between Sacto and SF for work. About every 8 weeks I'll get a call or email from a stranger at my company asking how it is working from Roseville then also asking about the housing market. This is very common in high tech esp in positions where you can work remotely, which explains why places less desirable now have higher costs of living. It also explains why W. Sac, Woodland, Lodi, Tracey, Patterson, Elk Grove, Dixon all have ridiculous housing prices. Has anyone ever been to Patterson? It's in the middle of no where, and I mean no where. There was nothing there when I'd drive through there on my way to LA on I-5. After seeing homes srout up a few years ago, I stopped at the gas station and asked the guy behind the counter what industry there was in Patterson to support thousands of houses. He simply replied that it was all commuters from the bay area. Which explains why in the middle of timbucto there's 1500 sq.,ft houses for $400k+ and explains why Woodland, which was a poor rural town has a median home price in excess of $600K. Proximity to the bay. Just unreal.

Gwynster said...

Jeff,

You forgot the lovely town of Dixon. Prices kept going up and up despite the only industry in Dixon is an onramp to the I80.

I did have one owner from Dixon approach me to lease her home. She was commuting to Danville and has now moved back. She can't sell the place and can't get any takers on her $1800 mo lease offer. I told her my limit was $1300 and she got snotty. Her place is still vacant, It's now reduced to $1700 and still no takers for another two months.

James said...

My Econo / Sacto-area RE Forecast for next 3 years

- Dollar collapses to 65 cents per Euro. Oil rises to $90 barrel, gold $900 oz.

- Inflation roars back, forcing Fed to raise rates to 7%. 30-yr fixed 8%.

- Inflation causes wages to also explode higher

- After a tsunami of mortgage defaults, Feds make neg amor and no money down mortgages illegal. Money gets tighter. Many banks go out of business.

- House prices will dip 20% but recover quickly, buoyed by inflation. In 3 years, your $600k house will still fetch $600k -- but those will be with devalued dollars, meaning a real negative return when adjusted for inflation for those who hold RE.

Real estate is local... except when national and international currency, debt and trade imbalances reach the tipping point.

The Bush/Greenspan policies have sold us down the river.

Jeff said...

Gwynster, read again, i did post dixon in my summary :) i couldn't miss that. I'd like to have mention Davis but that place has always been out of control so no news there and no building allowed. Anyway, found another interesting item on craigslist again....$173/sq.ft for a home in Roseville. Watch out, the sky is falling! :)
http://sacramento.craigslist.org/rfs/253137169.html

Gwynster said...

Doh! I missed the Dixon nod on your post.

gimme a break said...

anon -

------
Sacramento is losing lots of educated people to other states and they are being replaced by uneducated foreign immigrants.
-------

I would add uneducated foreign immigrants who have lots of cash (from india) or who don't have lots of cash (from mexico) who want to "own" a house.

in either case, both want a piece of the american dream and you're right lack of RE knowledge gets them into trouble as much as the american born status-seeker.

these along with bay area folk who do the 2-hour 1-way commute will keep prices up and allow for a soft-landing instead of the crash most are waiting for.

Also i have several friends who live in Tracy who commute to San Jose for work, put their kids to daycare or grandparents in order to balance their "happy life." is it worth it? personally, i think their kids will know their grandparents more than they know their own parents.

this is not uncommon. a 4/2 bed that's 2000 sq. feet is atleast 750k in San Jose. i live in santa clara and my neighbors's house that is spec'd at

2500 sq. feet
build in 1970
5 bed / 2.5 bath
2-story
5000 sq. foot lot

998k!

what's the differential in sacto? that house can go for $400-500k easy in a similar neighborhood.

if I was a betting man, i would keep a close eye on bay area folks as close as i would watch the 10-year note in how prices move in the 916.

paranoid renter said...

Wow. I'm so glad to see that I'm not the only one thinking that Sacramento prices can continue to stay buoyed by people coming in from the Bay Area.

When I talked about people moving here, I didn't necessarily mean commuters. I meant blue collar type folks that own a house in the Bay Area that missed the last boat when the price differential was high. They will move here and buy their house outright or with a very small loan when they get a chance again. The demand in the Bay Area of course depends on the tech industry, so as long as that does well, Bay Area prices will stay up. It just takes a few IPOs every year. :-)

I know several people that are in a weekly commute situation. They will stay close to their job during the week and come back on weekends. It's not ideal, but it's doable. They may do it for a few years to pay off the house here and then move into something else - franchise store or something else.

Sac has a lot to offer in terms of friendly, chilled out folks, tolerable weather (relative to other parts of the country), no seismic activity or wild fires. Those who cannot afford Sac will move to Texas.

There was a neighbor being built in 2004 when I was thinking of buying a house (in Roseville). Just for kicks I went there and drove around. Guess what - not a single house was on the market among the 100 or so that I drove around. And there were tons of cars parked outside each house, so these are not flipper-owned.

I think there will be a minor correction, but no crash. I also think that the analysis by James is pretty accurate (except for oil price which I feel will decline post 2008 to below $50 a barrel) because there are plenty of oil reserves and people will eventually wake up to that.

Anonymous said...

James said: "Dollar collapses to 65 cents per Euro"

That would represent a 100% gain in the strength of the US$ vs the Euro.

Anonymous said...

Housing bubble in the United States was caused by a loose monetary system. Subprime lending enabled millions of people to obtain loans they otherwise they could not obtain. This loose lending of course needed to be hedged by creating loans of a more toxic nature. As the years went by the pools of lower qualified borrowers began to dry up, however the appetitie of subprime to loan money did not. In the last few years this particulary this had a fraudently affect, in which loans were altered to ensure funding even beyond subprime standards. As prices are now dropping this fraud is being uncovered. This situiation is just now beginning and will only grow worse.

Look what is happening now and you will see that major subprime lenders are closing their doors or are serious curtailing their activity. This situiation has been brought on by their own greed as the subprime lenders have mortgage buy back arrangements with hedge funds that have been purchasing their loans. These hedge funds are now requiring that these firms buy back their fraudlent loans. Instead of actually buying back the loans they are declaring bankruptcy.

The fraud has now come full circle and over the next couple of years their is going to be serious pain.

No Bay area commuters are not going to save the housing market, That is a pipe dream. Foreign immigrants chasing cheap labor are only going to settle in cheap housing and create crime ridden areas. That has always the case in the history of this Country. Have you seen the reports? Crime is increasing rapidly in Sacramento.

California population is increasing at a much slower pace and people are leaving. This is only going to increase.

These things I have described are major events that are occurring now. Making predictions of "oh the Bay Area people will save us or cheap labor from Mexico will save us is foolish."

Perfect Storm

Anonymous said...

Peter Morici, business professor at the University of Maryland, said artificially low interest rates during the past half-decade encouraged China and other exporting nations to purchase 10-year bonds, which kept U.S. mortgage rates low and fueled the housing bubble, despite a gaping trade deficit that should have sapped investor confidence years ago.

"In order to play this ponzi scheme, the value of the homes had to go up faster than the economy grew and faster than people could service their debt. We’ve reached that limit," Morci said. "The housing market sustained the economy at a time of very large trade deficits. It’s been a false prosperity."

Were screwed. Game over.

Anonymous said...

I'm not convinced that the Sac housing market will be supported by Bay Area commuters. Why would they drive right past Fairfield, Vacaville, and Dixon, which probably have the same exact stucco boxes, built by the same builder, surrounded by the same kinds of strip malls and chain restaurants, to go all the way to Sac. Because they want to live in a flood plain?

===

" . . . artificially low interest rates during the past half-decade encouraged China and other exporting nations to purchase 10-year bonds, . . . "

This doesn't make sense. Bond investors like high interest rates. It's well known that China buys a lot of our debt, but it's not because the interest rates are attractive.

===

" . . . major subprime lenders are closing their doors or are serious curtailing their activity . . . "

I read the other day that Wells Fargo Bank, which has ignored the subprime market until recently, is now investing is this area.

===

"Sacramento is losing lots of educated people to other states and they are being replaced by uneducated foreign immigrants."

Many of the foreign immigrants moving to Sac are highly educated - engineers, doctors, nurses, and scientists who got their degrees overseas or in US graduate schools, like UC. Many are employed by State government.

Anonymous said...

I read the other day that Wells Fargo Bank, which has ignored the subprime market until recently, is now investing is this area.

Wells Fargo has always invested in subprime lending. Just look what makes up their investment portfolio and it will consist of Mortgage Backed Securites. Now if they want to start making subprime loans so be it, but if they are making subprime loans directly at least it will be under Federal Regulations.

However, Subprime lenders are biting the dust daily.

ACH will centralize its retail branch network into existing regional mortgage production centers in California, Arizona, Illinois and Connecticut. In addition, the company will consolidate many corporate functions at its Orange, CA headquarters. These changes will result in the total workforce reduction of approximately 3,800 associates and the closing of 229 retail branch offices.

On Wednesday Dec. 6, Agoura, California-based Ownit announced it was ceasing operation immediately citing unfavorable market conditions. Since 2003, Ownit originated approximately $17.6 billion in mortgage loans to borrowers with blemished credit histories through a network of brokers.

It is with deep regret that we announce Harbourton Mortgage Investment Corporation will cease operations effective the close of business today, December 20th, 2006.

September 12, 2006
Countrywide Financial Corp
Last month, Countrywide said July lending fell 19 percent from a year earlier, prompting an 8.7 percent decline in the company's shares. Before Tuesday, Countrywide shares had fallen 23 percent over four months.
The company is trying to decrease annual costs by more than $500 million, and said it has already cut more than $100 million of costs by reducing jobs and curbing other spending.

Good luck Wells Fargo

Perfect Storm

Anonymous said...

This doesn't make sense. Bond investors like high interest rates. It's well known that China buys a lot of our debt, but it's not because the interest rates are attractive.


The main purchasers of US Treasuries today are the sellers of low cost goods who are on the recieving end of our enormous balance of trade deficit. They are awash in dollars, and have few other places to send them. Besides, ppurchasing US Treasuries helps to keep US interest rates low, which allows credit dependent US Consumers to in turn keep buying their stuff.

So if you want the U.S. to keep becoming a credit dependent nation then so be it. Now please make the argument that being awash in debt is good. I always like to hear that debt equals wealth speech.

Perfect Storm

Gwynster said...

"Many of the foreign immigrants moving to Sac are highly educated - engineers, doctors, nurses, and scientists who got their degrees overseas or in US graduate schools, like UC. Many are employed by State government."

Now this I can speak to.

Depends on the country of origin. Not all countries universities are recognized here. I've seen people with law degrees from India working in furniture stores. I know this because I handled his application for a position at UCD.

Non-resident UC graduates are leaving the state in proportion to residents. Student VISAs are easy to get, becoming a resident no matter how well educated you are is not easy. I have one dossier on my desk of a professor who has been here for 5 yrs, married a US citizen and he's still on a work visa from Germany. The whole green card fantasy isn't how it works anymore. Also, many foriegn-born faculty are retiring and returing to their country of origin. I have one going back to China and four others leaving the state in the next 4 months from one department.

I study demographics all day, especially minority populations. CA has a significant outmigration issue which has been excelorating for 4 yrs. Illegal immigrants as well as well as highly educated natives are fleeing the state due to the high cost of living.

The issue of the immigrating population working for the state will not save us either. The folks that held those high-paying state positions are retiring and most positions are not being refilled. The state salary wages pretty much suck. Those folks may save housing market at a later date but not until the cost of housing equals fundementals.

Anonymous said...

Gwynster,

That makes sense to me.

Well put.

Perfect Storm

jeff said...

Anon 10:58 - You ask why bay area commuters pass up Dixon, Fairfield and Vacavill for Sacto? Have you looked at housing in these areas? I just pointed out that these places are much higher than Sacto, even Roseville, so why would someone live in that dump for 20-30% higher than the dumps in Sacto? It's all about the cost. When Reno was much lower in price than Sacto I knew a few people commuting from Reno to the Bay. That days, and prices, have changed.

Anonymous said...

So people commute from Reno to the Bay now. Hope it does not snow. Maybe people commute from Elko Nevada to the Bay. Are these people zombies who do not sleep.
When does commuting to New York become a better option, maybe somehwere around Omaha. I have got to spread this around.

Perfect Storm

Gwynster said...

I knew two people who commuted from Davis to the BA. One now works for UCD like his wife. The other moved to Atlanta.

All the other people I knew who commuted a long ways were working for Intel. A bunch of them took position at the AZ campus.

I'm not doubting that we still have commuters. I just think their numbers have diminished from 02 & 03.

Anonymous said...

"The issue of the immigrating population working for the state will not save us either."

I'm not saying the state needs saving. All I'm saying is that I work for the state and in many specialized work groups, such as those requiring engineers and scientists, it's not unusual for more than half of the work group to be foreign-born. Maybe the salaries aren't so good, but I'll bet these immigrants with graduate or engineering degrees are making more than the typical Sacramento-born resident with a high school education, 2-y degree, or less technical degree, and much more than they would make in their native country. And every time I go into Kaiser or a hospital, I see that many of the doctors and nurses appear to be foreign-born. Tech companies are very eager to expand the visa programs so they can hire highly skilled immigrants and I imagine that hospitals and HMOs feel the same way.

Re: retirements, there's nothing going on at the state that is not happening in every large organization in the country. Many experienced workers are retiring, but I don't believe that state employment is down during the last several years. Key positions get filled, even if it's with someone with limited English skills.

By the way, there are lots of US-born lawyers working in furniture stores or grocery stores or doing other things completely unrelated to law. And I don't thinks there's much demand in the US for lawyers who are trained in the legal system of India.

Anonymous said...

Anon 8:53

Yes, there are lots of new professionals in the Sacramento area replacing people who have retired. Their is a shortage of medical, accounting, and tech professionals.

Perfect Storm

Anonymous said...

Feds: Real estate boom fuels criminal activity
Parallels seen in mortgage fraud and commercial money-laundering studies
BY MATT WARD
Thursday, December 21, 2006

Massive expansion in the nationwide real estate market during the last few years has unleashed a wave of suspected money laundering, first in the mortgage industry and now in the commercial real estate business, federal authorities reported recently.

Does anybody have any stories of Sacramento realtors involved in fraud?

Gwynster said...

Anon,

I work for the state too. I see one or two good positions filled for every 5 that becomes vacant. I also work in socioeconomic research so I do see some local data before it hits the journals. I know people need to believe that outmigration coupled with boomers retiring won't effect California negatively. But it's already started and I don't see it slowing down any time soon.

Anonymous said...

Anon 2:38,

Mortgage fraud? Realtors? Check out the comments section here...

http://thehousingbubbleblog.com/?p=2017#comments

"Comment by Paladin
2006-12-17 06:05:24"

This area will be awash in vacant, foreclosed homes for years. No recovery until they all work their way thru the system.

HappyinSF said...

From west sac prices tumbled:
"I'm really starting to hate asian BA transplants. It's irrational, petty, and really not a good sign."

Gwynster,
Could you please not make racist comments about asians on here? Also, how many years are we going to have to hear about all the things you might do or buy? Sheesh, what a waste of everyones time at those openings you go to, just buy some damn cookies and a box rosay and stay home. Problem solved, no more exposure to those pesky asians and we don't have to hear about it.

Your small town faux liberal veneer is cracking.

Stayin' Dry said...

Wow,
58 Foreclosures and
512 Notices of Default
filed in Sacramento County in the last 7 days.

The "surf's up".....or is it a tsunami?

Sippn said...

I just checked, and unless any of you have rights to operate a Casino, no one here including me is more that 2-3 generations removed from the big boat, so back off the race talk, please!

Anonymous said...

THE SLUM IS BEHIND US. NEW HOUSING SURGE BEGINNING TODAY. 12/27/06

Anyone check the national report on new home sales that came out today? Inventories are way down. Sales are up. The slump is over!! Let the party begin again.

Stayin' Dry said...

Oh thank God the slump is over. Does this mean we get 20% annual appreciation again?

I am going to go buy two houses....let's see, should I make an offer on a Deutsche Bank foreclosure or an HSBC foreclosure?

And if I offer 30% off the foreclosed price, that will be about market for today. Will the foreclosed borrower be held liable for the HELOC 2nd which sent him under? That might hurt.

Hmmm, maybe I will stay out the water a bit longer.....

anon1137 said...

Isn't this the season for predictions?

My prediction for the 2007 Sacramento housing market: continued slow, boring decline, in the range of 5-10% y-o-y price drops amid slowly rising inventory. I think the market will be constrained by affordability. Wages won't increase much and long-term and short-term interest rates will rise slightly. Foreclosures will affect a small percentage of the folks who bought in 2005 through early 2006, but that won't have a major effect on the market - foreclosures will rise up to historically average levels. Builders will adjust production and prices to the current market and we will see more significant price declines in older neighborhoods, but nothing to get excited about. It's going to be like the early 90s. This bubble is going to take a long time to deflate.

I don't see a recession in the US - I see continued above-target range growth, with the Fed having to raise short-term interest rates again before mid-year. I think oil and gas prices will continue to rise with greater conflict in the Middle East, possibly spreading to Iran and Saudi Arabia.

Anonymous said...

981% is the point at which this market ( California ) will turn around. That's the % of the valley to peak of Trustee's Deeds. At least historically speaking...but then again...everyone's an expert.

~caddis

Perfect Storm said...

Hey Anon1137

Your prediction of 5-10% y-o-y price drops. How many years do you think this will be for?

anon1137 said...

PS:

Don't know - depends on the economy, wages, and interest rates. During the 90s slump, I think it took about 8 years before prices recovered to their previous highs.

What do you think?

Jeff said...

FL market is unraveling as well. This should help drive down the national market as well as the west coast. Implosion from both coasts! http://news.yahoo.com/s/nm/20061228/us_nm/realestate_miami_dc_2

Anonymous said...

James not only are you wrong on the currency, but your also wrong on the value of a house going up with inflation. Housing doesn't go up with inflation, it goes up based historically on wages. I don't believe anybody's wages have increased that much over the last 5 years to represent not only the historic run-up but also an increase due rapid inflation.

Anonymous said...

Seems to me that we have a long way to go before the bottom. The last Sacramento housing bubble took 6-7 years to go from peak to trough in median price. I wouldn't be surprised at all if 2011 was the bottom year. Who really knows though. Could be a few years sooner, or later. We'll have just have to keep watching the numbers.

-Renting and waiting it out in Sac

paranoid renter said...

Judging by the traffic in and around Roseville, I don't think it'll get affected much. Every day the traffic seems like it's getting thicker and thicker. Any reasonable time of the day and getting on to 80 from 65 involves going through a traffic jam. All these people must live somewhere. :-)

Just visited a couple of new condo developments in the area and they say that while things are slow, they are almost sold out. I guess people just seem to have ways to come up with the money. These are not flipper owned...people are actually living in them. The floorplans are so cramped, I can't bring myself to buy one, but if it's any indication of the way things are headed, those of us waiting won't be able to buy a decent _new_ place in a decent neighborhood, even if prices should fall a whole lot (which I am really starting to doubt).

jeff said...

paranoid renter...

don't believe the hype. so what if the condo community mge says "we're almost sold out." that's bs. i've been tracking those roseville condos and they just posted a bunch of units with a $35K price cut. also, your statement about all the traffic in and around roseville is getting thicker and thicker and they must live somewhere. yea, they live elsewhere and travel to the mall, shops, restarants, etc. they also could be fellow renters. additionally, lots of those condo owners are not living in them, check out the for rent ads and look at all the available condos. just keep patient.

Stayin Dry said...

Paraniod,

Prices are not going up in Sacramento for a long time, probably 5 + years. Your rent is 30-40% of the cost of buying right now. It is likely prices will drop, so just be patient. If nothing else, you will bank 100% of your rent value (or more, since rent is 30-40% of owning) compared to owning now. Save that money and have a much bigger downpayment in a couple of years. It is the ONLY way to build equity now. Otherwise, you put 20% down on a house today, and you loose it all when prices drop.

There is way too much standing inventory on the markets and now, we are seeing hundreds of foreclosures every week added to the mix. The builders are cutting prices too. The builder's costs are dropping substantially. If they can make a reasonable profit building and selling for less in 2007, 2008 & 2009, as their costs continue to drop, they will. Their ability to earn a living depends on it. Land is down 50% from 2005 already. That equates to about a 15% reduction right there. Materials costs are down. Subs are dropping their prices. And things have not even started to get tight yet.

Be patient, not paraniod.

sippn said...

Nice try, but China doesn't care about our little residential construction correction... they're still buying the heck out of copper, steel, cement, etc. The only commodity that dropped is lumber, not enough to even it out. Trades are still busy with commercial and the res guys who weren't busy have left already.

Oh yeah, the cities have decided to cut their permit costs and forego the revenue - fat chance.

Builders are still building with 2003-2004 land costs ... the 2005 land costs never made it into the mix.

Rents are up this year in all No Ca counties vs 2005.

Stayin Dry said...

Sippin 8:29,

Who are you talking to and what issues are you addressing?

Stayin' Dry said...

Sippin, This just in on copper from Bloomberg yesterday:

Copper futures plunged 10 percent this month as inventories of the metal used in wires and pipe grew, a sign of weakening demand. Stockpiles at warehouses monitored by commodity exchanges in London, Shanghai and New York have expanded 60 percent this year to 245,015 tons, the highest since June 2004, according to data compiled by Bloomberg.

``Plants that we are dealing with are either not using copper at all or using less of it,'' said Mark Lewon, vice president for operations at Utah Metal Works Inc., by phone from Salt Lake City. ``Home builders are the biggest users of copper here and they are using less copper,'' he said.

Copper futures for March delivery fell 2.4 cents, or 0.8 percent, to $2.871 a pound on the Comex division of the New York Mercantile Exchange, a one-week closing low. In intraday trading, the metal dropped to $2.83, the lowest for the most- active contract since April 20. The metal has fallen 29 percent from a record high of $4.04 in May as higher inventories and slower economic growth cut demand.

So much for your "China effect"....the price is down 29% this year.

The builders are going to be producing identical homes for 30% less by the end of 2007.

Sippn said...

Stayn Dry, From the same article you cited:

“Copper's 2006 gain in New York was also the fifth straight, on rising demand from China, the world's fastest growing economy, and on increased purchases from investment funds. The metal gained 41 percent in 2005, 39 percent in 2004 and 49 percent in 2003”

“Average home uses 400 lbs….” but like here in CA plumbers switching to more plastics (petroleum products)

So copper still needs to drop about ½ to get us to last years costs. Interesting article looks like copper became an investment vehicle for awhile and got speculated.

Lumber is down 15% from 2005/5 avg.

Steel is 10% over 2005, 20% over 2004, 50% over 2003

Construction machinery is 10% up over 2005

Cement is 10% over 2005, 20% over 2004, 30% over 2003 (china produces ½)

Gypsum up also, but I forgot to look

All Bloomberg or BLS data, even though starts are down.

The best overall costs did in the early 90s was flatten out for awhile.

From what I’ve seen, many production builders used a combo of incentives and prices concessions totaling 15-20% to clear out inventory. Homes built on land purchased/optioned in 2002-2004 (it takes awhile to develop) Many big builders blew off their land options this year, needing further inflation to make the numbers work.

Don’t know if you or I ever saw a tract home base on 2005/6 costs including land.

So I don’t really know where prices will be next year but suspect they’ve bottomed because like you said, they will not build at a loss. Starts are down 40% + over 2005 here and most builders made permanent changes to support this.

There was some fluff in the market due to speculation, but the resale market is moving from the center of town outward now.

When you read that homebuilders have 6.5 months inventory (national) , did you know that included empty lots, homes under construction as well as finished homes? Strange stat, but finished homes is about 2 months at the current slow rate of sales.

Perfect Storm said...

"The metal dropped to $2.83, the lowest for the most- active contract since April 20. The metal has fallen 29 percent from a record high of $4.04 in May as higher inventories and slower economic growth cut demand."

Drop of 29% that is a lot.

Stayin' Dry said...

Sippin, the stats I have show lumber is down over 35% from 2004 (http://tinyurl.com/yzc5q6). Cement has peaked and is dropping, according the cement contractors.

But the real point is the direction costs: Prices have peaked and demand is weakened. It will be easier to build cheaper homes than it was in the heady days of the last 3 years. Everyone's profit margins are skinnier, and the chill is on to get prices lower. The builders need greater levels of affordability for buyers.

There was an article in the WSJ about a home builder who saw his framing contractor come to the office with a calculator. The homebuilder had not seen that in 4 years. Costs are dropping across the board, and we have not even seen the real pain yet.

paranoid renter said...

We're probably getting to the stage where we'll see builders do multi-billion dollar writeoffs to clear their balance sheets just like network equipment vendors (Cisco, Nortel, etc.) had to do when the dot com bubble burst and took the whole telecommunications/networking sector down with it. That sector is healthy today, but it is no where near the boom. Fortunately, the cost of building technology gets lower with time. However, with real-estate, once the balance sheets are clean, the home builders will downsize and start building only that which is required. There will be a lot of lost jobs just as there was in the telecom sector during the telecom bust.

As such I don't think home prices will tank like crazy because builders can pretty much control the supply. They just have to get into that phase where they are forced to do an inventory write-off, layoff a significant portion of their work force and start building only that which is required.

Perfect Storm said...

If I were a builder I would cut costs and create new product lines and compete directly with the resale market. The way I see it there are six million plus resale home purchased in this Country yearly, as a builder I would want part of that market share.

If you think builders are going to cut back in order to maintain price level you have another coming. Why should they give up any potential profits to the resale market if they do not have to.

Sippn said...

Paranoid Renter...good call. Thats what the public builders have been doing, writing off and writing down values all year. Most have already down sized to 60% of 2005 levels. Public builders are driven by one thing.... profits and bonuses. Also read today's Bee the talking heads section on real estate.... builders delaying projects until the cheaper builder is done, etc.

Stay Dry, P Storm,

you're both right but these commodities are currently the exceptions to a complex puzzle. Starts have been down all year and the the fluff is now just coming off a couple materials? Not enough.

That framing contractor is just trying to keep his crews busy or loose them. Here's your article:

http://www.dfw.com/mld/dfw/business/columnists/mitch_schnurman/16175849.htm

Interesting... Horton made $1bil on 50,000 homes. $20K per home. How much can they cut the price? They cut $200 mil in overhead, but also cut production 45%. likely a wash per home.

Public fees and land costs are the single largest items in new home costs. You'll need to see it all get down to 2003-2004 costs to get support to where prices are today.

Yes building technology continues to lower the cost of the basic structure, but the final home continues to get more complex...like most other products, don't compare this to calculators and computers, its more like cars...the metal was replaced with plastic, but they added a DVD player. By the way, most appliance mfgs raise prices 6-8% 2/1/7.

There's 2 ways for the supply line to meed demand.. Cheaper supply or less supply... I think less supply is going to be the 90% solution.

Anonymous said...

Fannie Tightening Underwriting Standards
Fannie Mae has announced that, effective Jan. 30, borrowers must be qualified at “a fully-indexed rate that assumes a fully-amortizing repayment schedule” in order to qualify a loan for purchase by the government-sponsored enterprise. The GSE is also eliminating its “InterestFirst” interest-only loan product category and reclassifying it as a loan “feature” to be used with other mortgage products. In addition, Fannie will be permitting temporary buydowns for fixed-rate mortgage loans with an IO feature and making other changes to its IO underwriting.

Sippn said...

Perfect Storm 919

The large builders already have done the cutting, both people and production (see the article cited) and got rid of land options - DR Horton cut 1/3 land, 45% production.

Like GM and Ford, who finally realized that they cannot sell the quantity of big profitable cars here, can't pay the union pension plans, cutting back US production permanently. Investing in their plants in China, etc where there is a future significant growth, lower costs, etc.

The public builders all started hi rise divisions (there's your answer) and they're all building condos also. Don't expect imported mobile homes from China.

The Katrina Cottage is a great idea, but put it here in California and add Land ($125K plus) and permits/fees (Rancho COrdova $100K) and you have a $250-$300K 1 room shack.

SIppn said...

BTW

The investment guys, Hansen McLain originally turned me on to thi blog from their radio show.

Yesturday, they were all giddy about investing in the stock market.

After a boom year, they want us to throw more money into the stock market due to prior performance. Says the fundamentals are good.

Those fundamentals rely on our economy continuing as is and better. However, they also suspected the stock market up tick is partially from money fleeing real estate.

Is the stock market bubbling? is it relying on fundamentals that are perched on real estate performance? Are these guys as blind as a real estate broker selling real estate?

Just asking.

Happy Renter said...

http://www.sacbee.com/103/story/100430.html

Perfect Storm said...

Sippin said

Paranoid Renter...good call. Thats what the public builders have been doing, writing off and writing down values all year

Sippin said

The Katrina Cottage is a great idea, but put it here in California and add Land ($125K plus) and permits/fees (Rancho COrdova $100K)

Are they wirting off land, which would make land cheaper or is it getting more expensive?

Sippn said...

Good question - They wrote off options to purchase land (did not buy) and wrote down land to current market value (supporting today's price)

Lets look at how much they write off:

Horton(#1) - about $200mil - $4k per home - peanuts.

Toll - $152mil - Is it per home delivered 8900 homes in 2006 = $16k per home (not much for homes over $1 mil) or do you divide it by the 90,000 lots they control - peanuts again.

Do I think these guys set themselves up to make bonuses in 2007? - they're trying. Did they take the size of writeoffs to get land costs to 2003-2004? not really.

Does the land have to be sold - no. Many land holders have deep pockets and will wait it out - some until the next peak.

But you're thinking!

Perfect Storm said...

Fannie Tightening Underwriting Standards
Fannie Mae has announced that, effective Jan. 30, borrowers must be qualified at “a fully-indexed rate that assumes a fully-amortizing repayment schedule” in order to qualify a loan for purchase by the government-sponsored enterprise.

It looks like Fannie Mae is tightening and several subprime mortgage companies have gone bankrupt. Coupled with thousands of foreclosures this will cause less buyers and further decrease in home prices.

Sippn said...

FNMAE - that is going to suck. Good timing! We're with the govt. and we're here to help.

Stayin' Dry said...

Sippin,

You can not hang this bubble on the Feds. I think the private capital providers, mainly the sub prime lenders did a great job of adding to the frothiness. Their recent meltdowns (Ownit, MLN, etc) and their now tighter controls will take the top 40% of the GF's right out of this market.