Thursday, February 22, 2007

"The Day of Reckoning Has Arrived"

From the Sacramento Bee:

The dive in new-home construction around Lincoln has created a monster for a small school district, as developers' fees slow to a trickle and the interest mounts daily on $189 million that the district borrowed to build new schools. The result of the downturn is a "staggering" amount of debt for Western Placer Unified School District -- and the day of reckoning has arrived, according to a report presented to the school board Tuesday night.

For years, the district has struggled to keep up with Lincoln's mushrooming population. Its enrollment, now 5,500 pupils, has grown 45 percent since 2002-03. All that is changing. New home construction dipped precipitously in the past year. Just 1,060 units were completed in 2006, compared with 2,900 the year before, according to Lincoln city officials.

That translates directly into diminishing dollars for the school district, which has a 2006-07 general fund budget of $37 million. So far this year, only $370,000 in developers' fees have materialized of the $2 million anticipated. "Something that popped out and hit me right between the eyes is the huge debt," said private consultant Curt Pollock, the report's author and an expert on school facility financing.
"The projections were that we were going to continue with this nice growth, and our projections were wrong," he said..." Had the housing market not dropped off so fast and so dramatically, I don't think we'd be in the situation we're in," [former Superintendent Roger] Yohe said.
From the Auburn Journal:
With a slump in the housing market slowing property tax revenue growth and worker costs rising, Placer County supervisors were warned Tuesday to expect some tough budget decisions in the coming months. Projections are that tax revenue next fiscal year will grow by $7.1 million -- which won't offset the $28 million county budget forecasters say will be needed to sustain operations at current levels.
[Therese] Leonard [County Executive Office principal management analyst] also outlined to supervisors that building-related revenues are proving to be the biggest drags on the budget. Real-estate transfer taxes are down this year by $953,000, supplemental property taxes declined $997,000 in the first six months of the fiscal year, and construction permit revenues dropped $507,000.
From the Sacramento Bee:
Born during the Great Depression, the 20 percent down payment traditionally used to buy a house has now joined $1.50 gasoline as ancient history. More than 1 in 5 California homebuyers now finance every cent of their home purchase, says the California Association of Realtors. Seven years ago it was 4.5 percent.
In the past, mortgage lenders wanted collateral in the form of 20 percent down. But the housing boom and its spectacular rise in home values largely erased lending risks. That pushed the industry to flood the market with easy money.

The trend raises questions about whether a looser lending standard will affect the market during a downturn. Some fear owners with none of their own money to lose may have fewer qualms about walking away from homes if they get behind on payments. That could aggravate rising foreclosure rates in regions like Sacramento where the housing market has slumped.
From News 10:
There is an ugly secret working its way to the surface in many of the Sacramento region’s most stable and sought-after neighborhoods, where homes are new and the prices high. People living in these communities won’t even utter the "G" word for fear it will drive home values down. That's the result of having the stigma attached of ‘Oh, they have gangs.' But gangs in middle class neighborhoods are more than just a fact -- they are on the rise. It is a perplexing and growing problem that police are finding has little to do with income or race.
Another huge contribution to the problem is parents who work long hours to pay for their high-priced new homes, leaving their teenaged children unsupervised for long periods of time every day, [Dr. Charles] Scott [a U.C. Davis child psychiatrist] said.


anon1137 said...

Man, there are loads of pending sales in Midtown/E Sac - I don't think the buyers are getting the knives/fools/doom message. Seems like a full-on frenzy out there, even the pricey stuff. That's my subjective assessment anyway. In other news, I notice that foreclosures in Sac city continue their upward march.

Happy in SF said...

Gangs in Vacaville? Rancho? Uh, just because you were stupid enough to spend a mint on a house in South Sac, Rancho, Vacaville doesn't mean these places only came into existence in 2004. Guess what, these places were cheap, low income, high crime areas prior to the boom. While Vacaville has always been a pretty average middle class town, I recall a lot of gang violence, shootings in the 90's. So the lesson is, don't spend over 150k on a house somewhere people get shot in the face regularly and then complain about it.

Happy in SF said...

Who said there would be a major drop in prices in East Sac?

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

If you look on Craigslist in
El Dorado Hills .. I found
a beautiful home with granite
counter tops, 5 bedroom over
3000 square feet and they are
asking 2100 in rent. Now
I compared that to a comparable
(newer in a nice area same as
the rental)
home for sale there.. and found
the lowest priced one (no granite) for 579,999. If you were to put
down 10 percent the monthly mortgage amount would be $3311 at
6 and a half percent ...add another
minimum 575 for tax and insurance
for a monthly mortgage payment of
3886. Now since the inventory
must be bought up by someone who
is not already a homeowner to make
a dent... what person would decide
to buy for 3886 when they could
rent for 2100? You can test it
out yourself by looking up rentals
on Craigslist and also they
have homes for sale.. and you can
check out what the mortgage costs
would be using by clicking on assumptions. They
automatically use 20 percent down
but I calculated it at 10 down.
Don't forget to add tax and insurance for the final figure.

ralphk said...

Lexi - I responded to Real on the older thread and thought I'd move it over here because it ties in with your comments:

Real, I absolutely refuse to pay $391,000 (4.5 x 87k - your median income)for the type of house that much money will purchase.

However, I might be interested in the same house at $261,000 (3 x 87k.

I guess value is in the eye of the beholder.

At $261k I can't afford to rent. At $391k I'd be foolish to buy.

lexi said...

Excellent point Ralphk and you've
described exactly why I am not
buying at this point.. I also posted this after yours on an earlier post and am adding it now
as it ties into yours here..

Fools rush in ... bubble sitters
wait, realtors and mortgage brokers
try to change bubble sitters into
fools. If the market is so great
why is everyone trying to convince
the dumb old bubble sitters? I guess they need fresh fools.

Patient Renter said...
This comment has been removed by the author.
Sittin' Out This One said...

Lexi, don't forget your $58,000 down payment would add $3,000/year to your income, invested in T's. You will also get some tax advantages to your home interest deduction of $33,930 off your income. If you are in the marginal 25% bracket at that level, you will save $8500/year. So it appears the downward shift in market values is gettin you closer to home ownership.

The real question is if the market will fall below the inflection point where it makes sense for you to buy. It normaly does in a downturn.

anon1137 said...

happy - people are expecting prices to drop everywhere. I expect they will drop in midtown/E Sac eventually too, but there are a couple factors that could keep them up for awhile: 1) expansion of the hospitals out there, 2) the fact that many of the properties are being renovated and improved.

ralphk, lexi - you're too sensible. I think a home is usually an emotional purchase (e.g., reproduction, babies) for most buyers.

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

Actually, I had our tax lady
go over it twice and we would
save around 3K a year off taxes
if we bought again. We rent for
1800 a month on a house that would
cost us 2800 a month to own so
when all is said and done we
save 9k a year renting and when
we decide we want to move all
we have to do is give a 30 notice
and no worries opposed to 30K in
commissions and closing costs to
sell. It's a no brainer right now. I do want to buy eventually,
but I don't want to buy just
because I want a home... because
right now it would drag me down
financially, and how can you love
something that drags you down

ralphk said...


I'm an army brat, that and a career that's moved me around makes it much less emotional for me.

There's also a vicious rumor that I'm cheap...I prefer thrifty.

Heck, I'm probably happiest camping.

Where prices are heading is anyone's guess. Mine is down.

Up or down. Life goes on and we all adjust accordingly and hopefully make wise decisions.

Perfect Storm said...

Crime in midddle class paradise.

You bet there are gangs all over and things are going to get worse. Subprime has enabled a bunch of crap to buy homes and they are destroying the neighborhoods. Elk Grove is slowly becoming an extension of South Sac. Antelope will be one with Northighlands.

These areas that are already invested with gangs causing these areas to resemble a third world nation. Rio Linda, Norwood area, Del Paso Heights, Oak Park, South Sacramento will all decrease in home value by 60% in the next two years.

I hear in Rio Linda your next door neighbor will rob you blind.

Sippn said...

Agree that neighborhoods are better when buyers have "skin in the game" don't really like 100% loans unless its for me :).

So whats happening is these no money down neighborhooods are starting to look like 100% rental neighborhoods - right?

Thats why you buy, ultimately.

Ralphk probably has developed a skill over the years to spot better rental neighborhoods.

But most people coninue to buy for emotional and family reasons investment returns are usu just a great side bene.

If we all followed our CPAs advice, we'ed buy used cars, make our own coffee and marry for money.... or at least father Anna Nichole Smith's baby.

Sippn said...

I guess I don't feel too sorry for the Lincoln School District - those builder fees are supposed to be used for building buildings, not funding bodys - thats what property taxes are for.

Diggin Deeper said...

It would be interesting to know how many were added to each city's employment roles to keep up with the real estate bubble over the last 5 years. They certainly don't need the bodies today and if budget cuts are in order, I wonder if they will cut people or just cut funding? I have feeling the job cuts overall in Sac have yet to filter into the economy. It might take another six months or so to feel the effects of the loss or cancellation of new home construction projects.

ralphk said...

Sippn - "Ralphk probably has developed a skill over the years to spot better rental neighborhoods"

Yeah, look for the neighborhoods with fewest cars parked on the lawns :)

Embdddsgnr said...

Regarding East Sac.: I completely agree that it will not feel the pinch the way other areas will (or are). Within a few blocks of where I live, several houses have recently sold, for very high prices. However. . . there are even more houses not sold, sitting empty, with similar asking prices; three on my block alone. And there are even more houses that have sold, but when the data is available, you see that the actual sale was in some cases up to 10% less than the original asking price. Some of these were flippers that bought/fixed up/sold and I can't figure out how they made any money. One guy rented his place, and I know he's not making any money on that one alone.

My point is that even in this very desirable area, the current market conditions are having an effect.

Happy in SF said...

I'm totally not saying that prices will not come down in East Sac, but I've rarely heard anybody predict housing doom there.
I do find it funny, however, that East Sac was cheap when I moved to SF in 1997 (excluding the big opulent mansions of course). People I knew who worked at bars/retail downtown were buying up the small charming 1920's bungalows in E. sac and Land Park for 100-130k. Sacramentians like the suburbs, this has been changing but back then far fewer people wanted anything to do with downtown or small old homes.

anon1137 said...

Embdddsgnr, Happy - I've learned that there are many, many factors that affect the value of homes in older areas like E Sac, where development has taken place over many years, during periods where there may have been no codes or rules whatsoever. Lots get chopped up into 2 or 4 or 6 pieces, buildings sitting right on the lot line, entire neighborhoods without driveways or garages, 2-3 story additions sitting 4 feet away from a single story neighbor, alleys that may be quaint or may be homeless camps, trains blasting by six feet from your bedroom wall, ghetto-style apartment buildings located next door to $1M mansions, remodeling done by artisans or by incompetents, etc., etc. Values are all over the map, even on the same block. It's very complex - Zillow is almost completely worthless in these neighborhoods except maybe to indicate trends.

The mkt in E Sac isn't as frantic as it was a couple years ago, but I can't say that prices have definitely peaked yet. I'm lately surprised at all the activity in the >$1M range - maybe the buyers figure they'll be there a long time and want to lock in the low (relatively) mortgage rates. And I guess if you work in health care, you're not worried about your job or the direction of your salary.

Diggin Deeper said...

IMHO There are pockets in every major city that will hold up better in a downturn. Neighborhood disireability features such as crime rates, schools, convenience, amenities, etc will play a big role. Problem is that if a high percentage of the real estate in the city overall is being pressured downward alot of these features begin to mean less and less as pricing deteriorates. Eventually, if the fall is severe enough, those communities will suffer as well. The higher end established communities probably face less pricing risk over the long term, however, where in Sacramento do you find the true "over the top" neighborhood? Does East Sac or Midtown fall into the category?

Athena said...

ooh! The piper is on the phone! Wish there was more information flowing in Sonoma County. Same things are happening. Tons of vacant homes sitting on the market, but nobody wants to talk about it. The local press and the REIC are all in bed together or married to each other and they have circled the wagons and are not talking. It is going to take some good old fashioned investigative expose kind of reporting to blow the lid off what is really happening here.

Perfect Storm said...

Media only talks about subprime right now, just wait until they find out about ALT and Prime delinquencies and foreclosures. They’re way up…..

Were on track for a 50% decline by 2009.

Perfect Storm said...

According to the Marcus & Millichap Real Estate Investment Brokerage Company, the national median rent for 2007 will be US$943.00 a month, only 60% of the median mortgage payment of US$1,566. With housing prices expected to decline further, one must ask why buy when you can rent?

Diggin Deeper said...

Just an opinion but if one adds the consumer debt to the real estate bubble and they both are added to the money supply issue, the problem really magnifies. Kind of like three bubbles rolled into one. I tend to agree with Perfect Storm. Subprime isn't the only segment that could add to the real estate market's woes. Lending over the last five years allowed great credit borrowers to overstep their means with a buy now pay later mantra. I constantly read about the Federal Reserve being concerned about inflation but have to ask whether there's anything they can do about it? Raise rates? Not if they want the real estate market to completely implode. Lower rates? Not if they want to the country to have to fight high inflation. The Fed has backed itself into a corner and it will be interesting to see what it can do, if anything, to stabilize the markets. I keep wondering if the price of gold is telling us something? The last time it was this high, the country was mired in high interest rates and inflation. Housing did fine in that enviroment, only homes hadn't risen nearly as high or as fast, on a percentage basis, as they have over the last five years.

paranoid renter said...

I constantly read about the Federal Reserve being concerned about inflation but have to ask whether there's anything they can do about it?

The plunge protection team will step and save the economy!

Perfect Storm said...

Latest from imploder

Regulators have shut down Mesa-based Eagle First Mortgage and its more than 75 Valley branches, citing illegal lending practices.

The Arizona Department of Financial Institutions pulled the license of the mortgage firm and its broker, David Sanchez, last week. Regulators described more than 100 illegal money transactions, loan activities and hiring practices.

The firm, one of the largest that Financial Institutions has shut down, has until March 14 to finish any outstanding loans and close its doors.

Another liar loan cult gets nailed.

Housing Doom 2007.