Saturday, May 12, 2007

Forbes: Sacramento Housing Market 3rd Most Overpriced

From Forbes:

No matter the locale, its denizens almost always gripe about the stiff cost of living, housing and doing business. But in some places the financial pain is clearly more acute than others.
...
Using the 40 largest metro areas, we started by estimating a "price-to-earnings" ratio for each market. (Like the P/E of a stock, this value attempts to measure the price a homeowner would pay for one dollar of return.) Using data from the National Association of Realtors (NAR), the U.S. Census Bureau and the Office of Federal Housing Enterprise Oversight, we took each market's median home price and divided it by annual rents minus taxes and insurance for those properties.
...
We incorporated a second metric: an affordability index. Calculated from National Home Builder Association and Wells Fargo data, the affordability score is the percent of the population who can afford to buy the median-priced home, assuming a 6% mortgage rate.
...
So which markets are in bubble territory? Look for a high P/E ratio, low affordability, low income growth and a high cost of living.
...
The usual suspects littered our list: [San Diego was first and] Miami came in second, followed in order by: Sacramento, Calif.; San Francisco; Washington, D.C.; Honolulu; New York; Los Angeles; and Boston. San Jose, Calif., rounded out the top 10.

43 comments:

Gwynster said...

We stopped at a Meritage complex to see if they really dropped their prices, which they didn't. They just repackaged their original offerring for marketing purposes.

The interesting part was that the saleman referred to this article once it became clear we weren't going to buy and got to talking shop.

Driving through the Bridgeway Lakes division on the way out, we drove down a street where every 12th house was for sale and it was a pretty long street. The DH counted a bunch I didn't notice since some only had signs in windows and not the lawn sign posts.

When I looked at this area last Dec, there were some for sale and loads for rent. I guess they've decided they can't hold out and are hoping a greater fool will come along to save them.

Sippn said...

Forbes "most overprice list" also looks like "most buyers from higher income areas moving there" list. That is why Nebraska is not on the list, duh.

I especially like Honolulu on the list - measureing the income of surf bums, etc. vs the internatioal wealthy who bid up the prices of property there, thats too funny.

Sittin' Out This One said...

Gwynster,

I see the repackaging everywhere. Some homebuilders are talking $150,000 discounts, auction pricing, etc., but when you look at the net price, it is the same thing they offered in mid 2006. And a few people are still going for the bait....

BTW, is DH short for Darling Husband?

Gwynster said...

Or Dear Husband. I'm just a lazy typist.

Gwynster said...

Sippin,

I have to disagree on the rich people moving here theory. That may have happened in 2000 to 2002 but it certainly hasn't been happening for a while.

If we're getting so many wealth people then why is our median household income still basically flat if you adjust for inflation?

Even the inmigration numbers are much lower in 2003 to 2006. Only thing keeping the population from turning negative is the birthrate.
In neighboring Solano, their population has turned negative.

What we're really getting the rejects from Oakland now. I see them every time I go to the Downtown or Arden Mall. It's gotten to the point that I don't go there at night.

Even the inmigration numbers are much lower in 2003 to 2006. Only thing keeping the population from turning negative is the birthrate.

Rob Dawg said...

The "high cost of living" bit can be overplayed. I live in Ventura County and except for housing and business property it is a cheap place to live and work. If you bought 6-8 or more years ago the high cost of housing isn't part of your personal cost of living. The fact that it takes takes a $300k salary to live a middleclass lifestyle today only applies to a small fraction of those here.

Gwynster said...

Robert,

Median household income here is about 57K, median home price is 389K. That's pretty simple math.

lexi said...

Now that prices are coming down
everywhere.. that's when it hurts
places like Temecula and Sacramento. Once prices are coming down and gas prices are up
there is less likely a reason to commute over an hour away... like
a lot of bay area people did and do. Yes, Temecula will be hurting
for a while as demand plummets from
San Diego and Sacramento will be hurting from less demand from the bay area. It's only worth commuting and paying huge mortgages
when you think it's going to make you money. The money well is dried
up now and housing is a huge risk
that most people don't want to take
along with long commutes and huge
mortgage payments. Until prices
get back to reality and it makes
sense demand will continue to plummet. Sacramento is overpriced
artificially from San Francisco
as Temecula is from San Diego. I'm thinking 2002 pricing was about
right for now.. only the market is
stuck on 2004 or higher prices.

Rob Dawg said...

Median household income here is about 57K, median home price is 389K. That's pretty simple math.

Respectfully no. Around here 80% of the people who live here can't afford the median yet those same people, those exact same people own 70% of the houses here. The math isn't simple.

In VenCo only about 40,000 of the 180,000 DUs have mortgages that would indicate a purchase price at or above the median. Interesting?

norcaljeff said...

Sittin, you are correct. They won't drop prices, only show higher or lower "incentives" as they don't want to outright piss off current owners. Although I don't really see a difference. And prices do seem really similar to end of Summer '06.

Gwynster said...

Well from the way you put it then there is no hope for me ever owning because I didn't buy before the prices went up.

paranoid renter said...

Gwynster,

No worry...I'm in the boat. Can't buy unless prices fall big time.

Cmyst said...

My take on it is that prices are sticking because all the equity has been wrung from homes. Sellers don't drop prices because they can't.
Soon, the lenders/REO will make the hard decision to slash their asking prices. In combination with buyers who are getting pretty good at offering a whole lot less than what is asked for, that should begin to prod things along.

In the meantime, many of us are snug as bugs in rugs in our rentals. And it isn't looking like rents are going up to me. I sure don't feel any compulsion to buy. Some of the homes I'm tracking are really appealing, but not appealing enough to make me want to gamble the difference between where they're priced today and where they will very likely be priced in 3 years.

Perfect Storm said...

"I sure don't feel any compulsion to buy."

Same here I won't buy for years and I know a lot of people who will not buy, unless the price is somewhere near the cost of renting.

I like having my wifes and I 401K maxed out and putting away a lot more on top of that, no way am I givng that up to buy some stucco crap box.

This is a slow motion housing implosion, wait for it.

Rob Dawg said...

Well from the way you put it then there is no hope for me ever owning because I didn't buy before the prices went up.

I don't believe that at all. By renting for say another two years the falling prices and rising downpayment will intersect and from there you'll have your pick.

I sold all except my personal use residences '05-'06. I'll buy back three times as many in '09. That's not the permanently high prices you seem to think will persist.

buying time said...

Glad to see the affordability issue getting more press. When we moved here 6 months ago, I couldn't figure out where all the money was coming from to buy these houses. I even started looking at income data to see how we compared (thinking maybe salaries in CA were much higher than I remembered). Well apparently we do make above well above average money...but we still can't afford to buy!

Sippn said...

Here's the typical scenario of a Sac area buyer....

Young couple follows both Mom's in their semi retirement move to the area from the Bay Area. Both Moms buy homes about $1 million with mostly equity.

Young couple purchase top of the line tract home with about normal 3/1 ratios. Find that here in Sac area, their UPS job pays about 1/2 of bay area, are now 6/1 ratio based on current earnings, fund other things with rest of equity.

Market tanks, young couple loose home, etc.

Gwynster - this kind of stuff happens every run up, additionally, places like Sun City and Serrano attract people with equity, their income may not be measured the same way as Forbes is looking.

Cmyst said...

Here is an interesting comparison between the Cali and Texas markets at the height (for Cali, at least) in 2005. Read it if you want, but the pictures and glorious snark are available if you scroll to the bottom and click the numbers.
http://tinyurl.com/3baef7

REhobbyist said...

Gwynster: You are usually a very precise person. How exactly does one identify an "Oakland reject"?

Patient Renter said...

Rob said:

"Respectfully no. Around here 80% of the people who live here can't afford the median yet those same people, those exact same people own 70% of the houses here. The math isn't simple. "

Rob, come on. Don't ignore the obvious. Most of them either bought before the current price runup or using loans that allowed them to buy more than they could realistically afford.

The fact is, as Gwyn stated, that the median income and median home prices are decidedly out of whack.

Gwynster said...

New front in war in mosquitoes
Real estate agents urged to report untended pools, ponds.

http://www.sacbee.com/101/story/178766.html

smf said...

Some of us may be looking to purchase another home, like us, as the third child will cramp the house some more.

But we are both waiting till the market drops further.

We could be greedy and sell at a profit, renting for a while. But we like our current house.

Sure we will 'lose' some equity. But as I told my wife, I rather pay less for a house than more.

The calculation in simple. For every $100K drop in price, we save AT LEAST $100/month. It all adds up in the end.

And the last house we saw were from wannabe flippers that bought in 10/2006 and figured they 'deserved' a 150K payday.

They WILL sell at a loss now.

patrick said...

Notice the the "overpriced" areas are places you'd actually would want to live....

My brother sold his newish Davenport, Iowa house last year, 4/2.5, 1/4 acre, paid 179k in 2001, sold last fall for 169k, 5 years and he lost 10k..... took 6 months to sell....

Sippn said...

Cmyst - that was pretty funny!

You're all invited to move to Texas and leave my beaches and ski slopes a little less crowded, and leave some more space in the UC system for local kids, thank you!

Sippn said...

Gwynster - now they're picking on you. Should have just called up the old Sippn and bought that drink!

Was going to tell you nobody shops downtown or Arden anymore, but found myself, DW and daughter shopping there Sunday. Place was packed.

Doesn't anybody have mothers to have lunch with? Guess they like to shop also.

Gwynster said...

I was referring to people who were unable take the heat in gangs in Oakland so they came to Sacramento and brought the environment with them.

People who relocate from Oakland in an effort to leave the crime behind are all good in my book. This is not a racial or classist issue. Please don't try to make it one.

Gwynster said...

Sippin,

My mother is in OC so I see her seldom. She wants to see over the long holiday weekend so being a good daughter, I'm obeying her wishes. And frankly I'll take any reason I can get to delay trekking to OC. I dread ever having to go below SLO >; )

People will pick on anyone when they are mad; like the crazy phone call I wrote about in the Water cooler thread. I'd swear the entire state has moved into Anger in the last 17 days. Something is in the air.

Sippn said...

Anger the past 17 days? IRS cashed my tax check, wasted it.

Patient Renter said...

"I'd swear the entire state has moved into Anger in the last 17 days."

Speaking of anger, some angry sounding posts from Sippn's buddy Real over at Sacrealstats. As this thing progresses, look for more of what we've already seen - "fire sales", shootings, suicides, bankruptcies, unemployment, recession, and blog posts from people trying to convince the world that everything is ok.

Sippn said...

Now, now patient renter, this may be only the 2nd time I've commentted on Real.

Just don't be so fast to accept the words of some economist who was lucky enough to stumble on a model and market a really good concept of a book around it. He puts on his pants one leg at a time just like you and me, just nicer pants.

Patient Renter said...

I accept the words of any economist so long as they appear to be correct and based on factual evidence.

"lucky enough to stumble on a model"

You should probably stop right there with the commentary about thinks for which you have no knowledge. You clearly haven't read any of Shiller's research as your comment about "picking a time period" shows. Shiller's research explains the entirety of housing prices throughout recorded history, or about the last century. Picking time periods? If you want to disagree with his research, fine, but don't be so ignorant as Real to so clearly not even understand what it is you're disagreeing with.

Perfect Storm said...

"I'd swear the entire state has moved into Anger in the last 17 days."

Things are diffinently going to get interesting around here, best to keep a plain appearance and stay out of the way of the carnage.

Sippn said...

OK so he was the only smart economist to predict the bubble and all the other economists were idiots you must be saying?

Gwynster said...

"OK so he was the only smart economist to predict the bubble and all the other economists were idiots you must be saying?"

I'd say he was one of the few who told like it is and the rest knew that they couldn't come right out say what they really thought or they'd loose their funding.

Look at Thornberg for another excellent example. Leaving the Andersen Group was great move for him because I'm sure they were muzzling him.

Sittin' Out This One said...

Real, You may be counting your chickens way before their hatched. You can forget the economists and look at the 10 ground level factors which will forecast the market bottom in Sacramento:

1) Inventory Falling? No
2) Sub Prime at Pre Bubble level? No
3) Builder BKs? Very few yet
4) Stocks sliding for 18 months? No
5) Credit tight & rates rising? No
6) Media discussing dead projects? Some
7) Heavy epuipment idle & rusting? No
8) Forclosures falling? No
9) Price levels provide cash flow? No
10) Media touting homes as shelter, not investment? Few

The odds are much greater this market has a long way to fall. While Shiller does not always hit the nail on the head, his trends are generally correct. And he is gaining a lot more company: Forbes, Fortune, Business Week, etc.

This bubble will deflate more. The only question is the rate of deflation.

Patient Renter said...

"OK so he was the only smart economist to predict the bubble and all the other economists were idiots you must be saying?"

Where did I say or imply anything even remotely close to that? All I did was point out that you shouldn't try to argue against research you haven't read.

Sippn said...

"Did you not read this before you wrote it or did you not get the memo that there was indeed a stock bubble and that Shiller was indeed about the only major economist to predict it?"

So PR, first, I'm just entertaining myself.

2nd, look at your statement above. It says Shiller was the only major economist to predict - so I just assumed the others did not and therefore were idiots.

I too, expect these economists to be generally correct.... thats the easy part. Being really correct sets them apart. Throw 100 of them in a room and one will guess the future right.

Being an economist involves both skill and luck, you make your forecasts and hope that the variables you put in, happen, wether it be gas prices, FED rates, war, politics, immigration policy, trade policy, chinese investment, etc.

Patient Renter said...

"Being an economist involves both skill and luck, you make your forecasts and hope that the variables you put in"

As far as Shiller is concerned, he has no forecast. All he has is a statement that a bubble exists to the extent that housing has risen faster than inflation. The idea that housing rises at the rate of inflation is based on the historical price data he's collected. There are no forumulas or variables, just historical data. In that sense, the only question is whether history continues to progress as it has for the last century, of if things all of a sudden change and prices decide to rise faster than inflation. So, why would things all of a sudden change? This is where Dean Baker comes in, who points out that nothing fundamental has changed, supply of land, population growth, etc.

Sippn said...

Shiller

"you need a house, avoid a 2nd one.... stay away from the pack ..... don't expect 10% per year forever" can't disagree with him there. Good real estate investment advice.

Baker sold his house, increased his monthly payment 2x, pissed off the wife. I hope he found a good home for his equity to invest. Has a few good points and has put his money where his mouth is.

OK I will give it to you I haven't read everything about these guys.

But watch what they are saying... 1890-1990 per shiller, 1987 per Baker is where housing departed from fundamentals.

Thats about the time modern land/policy planning and rationed approved land was becoming a big deal, especially in the coastal states. While Baker says we have plenty of land, in practice it is not true in the markets that Forbes identified as most overpriced. In Nevada, it may take 90 days to get a major development project from thoughts to plans, in California, its pushing 10-15 years. That means there is no ability to supply housing quickly if growth patterns change. THat creates bubbles of opportunity and failure.

Compare to Japan? they have very little natural resources vs US, but even in recession, Tokyo is way overpriced in ratios.

I looked at Shiller's indexes city by city, very interesting... in places like LA and SF, very high correlation to commodities... because thats what housing is there, those who can pay the most, get it. In Dallas, pretty flat.

Here, because WSJ has identified us as an "inland boom city" (per Average Buyer) incomes from outside our area (So Cal and the Bay Area) will determine our prices or at least push them off the mean in my opinion.

I missed part of the Forbes reporter's interview on KFBK yesturday, but his parting words caught my attention - did anybody get the last sentence? sounded like he thought it wouldn't last.

Patient Renter said...

"While Baker says we have plenty of land, in practice it is not true in the markets that Forbes identified as most overpriced. In Nevada, it may take 90 days to get a major development project from thoughts to plans, in California, its pushing 10-15 years. "

If this is true, it would have some bearing on future pricing. Needless to say though, as of yet we've not had a real shortage of supply during the price runup, still prices went up anyways. It was speculative. Check out Baker's paper, "The Menace of an Unchecked Housing Bubble".

Sippn said...

If there were no shortage, we would probably not have an affordable housing issue.

Stumbled upon Shillers original chart, 1890-. Take a look at it. If he had chosen 1920 as the base year, his theory would not work.

Sippn said...

lets move!

Patient Renter said...

"If there were no shortage, we would probably not have an affordable housing issue."

If speculation didn't exist, then yes. Unfortunately it does exist. There's been more than enough supply for the population growth we've had. Again, check out Baker's paper where he cites govt. numbers.