Thursday, February 08, 2007

"Dominos Are Beginning To Fall"

The Bay Area's CBS station covers the Elk Grove auction:

The ripple from a slow housing market consumes a different victim almost daily. In the Belavida subdivision in Elk Grove, brand new homes sit for months. Desperate to avoid still more losses, home builder Standard Pacific sent upgraded model homes to auction last Saturday with a bargain price tag...[A] 4 bedroom home went for $440,000, a good $150,000 less than it sold for 18 months ago.
With so many homes on the market, it's almost impossible to sell your way out of a crisis like that. Consequently a record number of homeowners are going into foreclosure.

Appraiser Amy Perkins says that ripple has left major banks and mortgage lenders with staggering losses. "There weren't any short sales, very few for the last 3 years in a row," Perkins said. "And within a 20 mile radius I've been seeing 300 or more."
Mortgage broker Jennifer Miller of Green Valley Mortgage says the banks bear some of the responsibility; they made getting a home loan too easy. "They have started tightening the reigns a little bit and aren't just saying: just sign on the dotted line and we'll give you a couple hundred thousand dollar home," Miller said. "It's not that simple anymore."


Levi said...

Get something better to do.

So what, the market is dropping. Did you just not get to buy before it all went up and are mad about it?

What goes up must come down. (just not below inflation) and what goes down will come up. Real estate is up every decade on record. And will continue that ascent no matter what we have to say about it.

Perfect Storm said...

Hey Levi,

Got a problem with free speech or are you just ticked that somebody may have an opposite view of some highschool drop out realtwhore?

Were right on track for a 50% decline by 2009.

Housing doom 2007. Anybody who buys now is a fool.

lexi said...


I think it's more of the fact
some saw the train wreck coming,
and we're happy we weren't onboard.

It's a shame so many people are
going to be negativly affected by
this. I barely missed this one,
but I was burned in the last one.

On a side note... I had two realtors contact me in the last
couple of days. Ones I hadn't talked to since giving up looking
over a year and a half ago, so things must be getting pretty lean
for everyone in the Real Estate business. No wonder tempers are
starting to flare.

isthereabubble said...

At years end the market will be flooded with foreclosures. Kick back and watch the show, it's getting good.

bidder, bidder , bidder

Sippn said...

All things in this article are true except the price spread - sure someone paid $580K for one of the homes in 2006 - we don't know which model and what extras it had in it, what size? I think it was well over 3000 sf. (subtract out any cash back too)

Many comps on this street in the $400s for the past 2 years.

But the news was catchy!

Perfect Storm said...

I like playing this dominos game.

Gwynster said...

I think AgentBubble and Maxx had the breakdown on the prices.


We all know people who we'll mourn for.

# My best friend is about to get nailed by this carwreck of a market too due to 3 refis in 5 yrs on a house he never improved that he believes is worth 530k (bought for 110k of X street and 9th). The refis paid for his GF's LA lifestyle.

# A close friend of mine at work bought in 2004 in Davis and now either needs to rent it out or sell it. Thank god they can afford to hold on since their new place in the Presidio is free.

# My ex who wouldn't sell our place in early 05 and split the profit has had to refi out of a 6% fixed into an ARM to pay off Heloc and CC debt. He's back to living off the CCs again because he just can't afford the place on his own.

I have sympathy for #2 but others are screwed. I wish them the best and will help them move and proved drinks and a shoulder to cry on when the time comes.

The people I don't have a shred of sympathy for are the people that plain out sneered at me when they bought an over-priced house and told me I'd never own because I was too poor or too stupid.

And as payment for all my prudence, patience, and frugalness, I'm afraid that I'm going to get stuck with a huge tax bill to bail out these people out who over-extended to get into a house they knew damn well they couldn't afford. That just steams me.

I think most of us are in situations like this where we're feeling feeling torn. We tried to warn them and they wouldn't listen and now we're bracing ourselves when it happens close to home. The fact that it's also going to hit people who really had it coming and not just those dear to us is what keeps us going sometimes.

Perfect Storm said...

Date Inventory 25th Percentile 50th Percentile
(Median) 75th Percentile
02/07/2007 8,871 $289,900 $356,900 $465,000

A nice drop in the median for Sacramento in just one week. Check out housing tracker.

The real estate equity bubble is collapsing.

Patient Renter said...
This comment has been removed by the author.
Patient Renter said...


"All things in this article are true except the price spread - sure someone paid $580K for one of the homes in 2006 - we don't know which model and what extras it had in it, what size?"

You must have missed the part of the article that said the homes that were auctioned were models with ALL the upgrades. The price comparison they made was for the exact same size home. Cashback doesn't count for comps, thus, 150k loss: Done.

If you're going to try and put a positive spin on everything, at least do a thorough job of it. Keep in mind some things are what they are and can't be spun.

Diggin Deeper said...

There's really nothing to spin here. Facts are facts and the comps won't be looking too good if these auctions keep taking the prices down. Regionally, it would make sense that a bottom would form when the supply dwindles to a more attractive level, say 6 months or so. Unfortunately, with foreclosures just beginning to rear up, the new home market could very well dwindle in total inventory (likely at lower prices as we are now seeing) only to be replaced by distressed inventory on the subprime side. From the national picture it looks like all predictions of a bottom, so far, have been wrong. There hasn't been one major homebuilder projecting future prospects to the upside. Maybe its time to start facing some of these facts and gird more for pricing opportunities ahead.

" Real estate is up every decade on record. And will continue that ascent no matter what we have to say about it."

I have some Japanese friends that went through the late 80's through the 90's that would beg to disagree here. They, too, had excessive liquidity and low interest rates (still do) that just about cratered their whole economy. Past history does not guarantee future results only the hindsight or blindsight to make assumptions based on unchanging conditions. Conditions have changed and there's a huge liquidity overhand that could create havoc in financial institutions throughout the country.

Sippn said...

Diggn, patient - yes facts are facts - the TV reporter had 2nd hand info - wasn't allowed into the auction - was the reporter using the sales price for the 2400sf house vs the 3700 sf home the "investor" bought a year ago?

5 of the homes were models, 2 were not. Sizes range from 2400 sf - 3700 sf per the articles.

Again, most of the smaller homes had been selling in the mid $400s for the past 2 years, so its not a 50% "haircut".

Nothing is selling though, thats why the builders in January "sold the most homes since June 2005" per their press release.

Diggin Deeper said...

"Nothing is selling though, thats why the builders in January "sold the most homes since June 2005" per their press release"

sippn, you are right, new home sales did rise in January. Again, not because the market was great and tended toward an upswing, but because they were making deals and blowing out inventory with huge giveaways, price reductions, in a "make me an offer" environment. Buyers perceived they were getting a deal and they responded. There wouldn't be any news about these auctions if the market was balanced and moving in the right direction. There will be sales in any market whether its going up or down. Just transfers, alone, happen regardless of the real estate market moving one way or the other. Pricing pressure is to the downside. New home builders want out and will price accordingly to find buyers to bail them out now. Nobody wants to be holding the bag when the distressed properties are the competition of the day.

Sippn said...

Diggn, Sac Real Stats has a really good breakdown on foreclosures - mostly lower priced, not new subdivisions.

The problem with national builder predictions is..
big profits are gone permanently, they cannot reduce their costs to cover, they are still writting off land options against any remaining profits, 1st quarter 2006 was still big and profitable, so thru 1st quarter 2007, anything you compare against is crappy.

Japan had other problems during that time period.

Diggin Deeper said...


I lived in a great upper middle class neighborhood in SoCal from 2000 to 2005. Prices went up out of sight and I sold out. I go back to that same neighborhood, one that used to have the manicured lawns, lavish backyards, and generally an upward moving feel to it. Today, because of cheap money graffiti is showing up on the walls, petty crime is happening on a weekly basis, people are not maintaining their property, and it is going completely in the opposite direction. Why? Could it be that those that bought really couldn't afford to make the payments and tend to the property as they should. Because of the easy money liguidity, the exploding loans, equity lines of credit, etc. even the better neighborhoods will be affected by debt burdened homeowners just struggling to get by. To think that its only happening in the lower end neighborhoods is wishful thinking.

Sippn said...

Totally agree with you that liquidity is a big problem. People should have $ down payment into a home as well as anything they buy.

So, where do you start? Home loans, HELOCs, credit cards, bankrupcy laws, social security, auto loans, schools, regulation?

Then, politically, someone is going to have to prioritize....

lexi said...

"The problem with national builder predictions is..
big profits are gone permanently, they cannot reduce their costs to cover, they are still writting off land options against any remaining profits, 1st quarter 2006 was still big and profitable, so thru 1st quarter 2007, anything you compare against is crappy."

But isn't that why everyone was
jumping in the market? Big profits?
It didn't seem crazy to buy way
more than you could afford using
crazy interest only zero down loans
because ... you knew your house
was just going to keep going up.
It seemed a little dangerous to
buy with prices so high and
unaffordable but everyone was
feeling if they didn't they'd be
priced out of the market for good.
Now that people think housing
is most likely going to go down,
or at best stay the same,
they are looking at it in a whole
different light. The light of
reason. And most people reasonably
know if they aren't already in
the is not a good
time to jump in. Pressure on
prices is just beggining.

Sippn said...

Lexi - the builders were already several years ahead of the flippers, buying land in 2004/5 for 2006/7 with prices we'll never see because they've been abandon (given up land options).

Most of the large builders have scaled back to produce at roughly 60% of where they were. Inventory has been dropping and will until the prices return to profitability and demand supports it.

It appears that the closer in they are, the closer they are to achieving that equalibrium point.

The kind of profits I talk about that a public builder has to make to satisfy Wall Street... what they were getting was easy money, no matter how much they paid for land, Wall Street sent the money and next years price increases always covered the gamble and provided profit.

In a nutshell, it looks like to me, that the prices builders were wishing for in 2006 were adjusted downward some and that sales volume has returned to a sustainable number.

Parts of the resale market have returned to a normal pace, but there are markets suffering - like the Elk Grove neighborhood around the auction - 100's of homes on the market $400-600k.

Sold in '05 said...

The only place that the builders are STILL making good profits is in the still over-inflated markets like Sacramento. A house here costs the national builders very little more to build than a house in Missouri or Texas or Alabama, but the sale price here is STILL double what it is in those other places.

They will give up recent land options everywhere because they can re-option the same land in a few years for less than the write off, no big deal. They will stop or greatly slow production of houses in those low profit margin areas but fat markets like Sacramento will not see a real cut from the majors until prices have come WAY down (probably around early 2003 levels). These are their only easy profit markets even at much lower prices. So if you think they are unhappy about having to "give away" some stucco in Elk Grove, think again, they are just milking the markets that still have profits in them. I think that the national builders can probably still make money selling new homes at or near $100 sqft. Do the math on what those auction homes would have cost at that rate for a view of next year's prices. Anyone who bought in the last two years in this area is just plain screwed. You can refinance to get a lower rate (for now), but the price you paid was still WAY too high and the only way out is pay it or walk away.

Sippn said...

Building costs are just a fraction of the price in CA.

Fees 1/3 or so
Land 1/3 or so
Building 1/3 or so

You can buy a house in Nebraska for less than the fees alone in Rancho Cordova.

Sac Landing cited a good report on land rationing last month.

Maybe something with wheels.

arizonadude said...

"Sippn said...
Building costs are just a fraction of the price in CA."

Fees 1/3 or so
Land 1/3 or so
Building 1/3 or so

I think we need to take a hard look at the 1/3 fees part of this. Why are thes fees so outrageous?The people are letting the govt. screw them.People need to speak up about this problem.

Sold in '05 said...

The fees are not the same for major builders as they are for individuals or small fry local builders. National teams of lawyers make economies of scale apply to even mundane administrative tasks. Not to mention the large amounts of "grease" that a big company can apply to the squeaky wheels. If you think that everyone is equal in land politics you're wrong and in areas like this where there is a huge amount of activity there is also a huge amount of corruption.

The costs of land here in Sacramento, where we have an infinite supply, are 1/3 higher? I'm sure that the land up at Plumas Lakes drew a big crowd for the auction when it sold. Remember that today's prices are not what the land cost the builders. There is no way that back in 2000 (or earlier) when these companies optioned the land currently being built, that they paid any more than land is selling for TODAY around St. Louis or San Antonio.

Building costs? What? The cheap illegal labor is more expensive than citizen union labor? Maybe, but not 1/3. Lumber? They are buying in bulk from the same suppliers NATIONWIDE and even getting a discount on the freight from the shipping lines, railways and teamsters that ship it from Southern Siberia, Canada or Bum Frog Alabama. Centex, Horton and the Other Boys don't shop locally for materials, the entire West Coast would have been logged out. Concrete? Maybe but again this area has the advantage of competition as well as better access to raw materials. Not to mention that these thin little slabs are about as cheap as you can get for a foundation. Good luck selling a house with no basement in tornado alley. What material's left? I guess it could be all the f-in' stucco.

The big guys are still building huge tracts in Lincoln, Roseville, Elk Grove, Natomas, Rocklin and the beautiful Plumas Lakes. The houses get bigger and nicer but the prices are steadily sliding down, always just one step ahead of the resale market. Watch the $/sqft price on same size, fully loaded homes to help see through the smoke and mirrors of the media/realestate industrial complex. We're already near $150/sqft in Lincoln.

Wait and see if the market goes low enough, but I'm betting that they can easily go to $100/sqft (Centex is selling at $75/sqft in St. Louis today) and keep on cranking them out. It's all part of their business model.

Sippn said...

Rather than a detailed argument regarding this foolishness, lets try this.

If what you said had any truth, the large public builders would never have let go their land options and would be raking in profits even today.

Read the news, buddy.

RMB said...

Actually sippn, sold in 05 is pretty much right on the money. A big builder like KB was making about 150-200K per house on houses selling for 400K in 2005. How far can they fall and still make a profit. Construction cost both material and labor are currently falling, slowly but should accelerate as time passes.
As far as your last argument about letting options expire and paying the payment, this is a very good argument for a falling price. If the builders can get the land cheaper in the future they would be stupid to buy it at the price they optioned it at in 2003, 4 or 5.

arizonadude said...

You have not addressed the issue of why the people are letting these local governments bend us over a barrel for fees? Seems like when they need a raise they jack up the fees. Any bullsh@t excuse and the fees go up without anyone challengeing them. I thought the people were supposed to have a say in government through a vote. Something is wrong with this picture.

Athena said...

Amy Perkins is a smart cookie. She should come take a look around Sonoma County's market. The heads around here are still so buried in the sand it is pathological.

I imagine there will be few appraisers unscathed by those coming up the mountain with pitchforks.

Many of them were so in bed with lenders and realtwhores or literally married to them I think they will be the first to fall. The lenders and realtwhores will point at them first.

I imagine the honest ones left standing will be few and far between, and it will pay for those ones to be opening their mouths right about now and pointing out the emperor is buck-nekkid.

Sippn said...


I loove google!!

Link to KB homes:

2005 best year ever
made $842 million net income (profit) on 37000 homes,

THats about $23,000 per home in the best year ever, about 8-9% per home, and they are based in CA.

So where are they cutting $150k per house?

RMB said...


I love Yahoo finance.

If you look a KBH income statement and assume it is all attributed to houses than: The average KB home sold for 254K in 2005 ($9.4B/37K)with a average cost per house of 185K for a average profit per house of ~69K or 27%. Now with the price differences around the country for ability to sell and cost for construction this profit is going to be all over the place. For my example lets take a 1700 sq ft home built in the Stockton area. These homes sold for around 400K and the FB are still trying to get 400+K for them. KB's cost for these homes would be about 234K to build out. Construction cost would be about $85/sq ft or 144.5K, permits would run about 40K and the land would be about 50K per lot. Land prices when KB acquired (2002-2003) these lots was about 250K per acre and they get about 8 lots per acre. Figure 150K per acre for improvements and you get your cost of 50K per lot. So in summary on house sold for 400K in 2005-6 the total profit per house was somewhere around 166K. The overhead that eats into this profit can and is being slashed as we speak. The amount the builder can slash these prices is dependent on home much overhead they get rid of. As times get tough they may go all the way down to selling below cost just to keep the cash flowing. None of this is novel or new, large corporations operate like this all the time.

Hope this helps to clarify what the builder have been able to pull off the last few years and the obscene amounts of money they have been making.