Tuesday, May 29, 2007

"An Undercurrent of Worry"

From lendingclarity.com:

What will it take to shock the Sacramento real estate market back to life?

Behind the mask of false bravado and feeble optimism worn by industry insiders who think wishing can make things true, there is an undercurrent of worry. Let’s face it. The patient is ill. What will turn things around? In a word, affordability.

It’s pretty clear that we chucked the idea of affordability in the early 2000’s as home prices and incomes parted company. People bought homes they couldn’t afford with loans that offered low initial payment but blew up after a couple of years. The speculative fever that ensued was supported by low interest rates, easy-qualifying loans and 100% financing. Builders responded by flooding the market with new homes geared to the move-up market, at prices affordable mostly to those who had previously experienced windfall profits. Then the music stopped, and all the chairs were gone.

So here we lie. Too much inventory, too few buyers. Sales are slow at every level, though Sacramento real estate prices have retreated to mid 2004 levels. Despite sellers’ attempts to get in front of the decline, buyers pitch low-ball offers on everything. I attended a recent auction featuring the last 6 homes in a 220 unit Elk Grove subdivision. The seller, a national home builder, was able to unload only 3 of those 6 homes even at steeply discounted prices. What’s the problem? Again, affordability.
So the market will return to normal when the fundamentals or income and price once again realign. I’m guessing that happens when prices reach mid-2003 levels. With first-time buyers having to qualify on real income—no more liar loans—prices have a little further to fall for that to happen. Just my opinion of course.


smf said...

Affordability is one part of the equation. Quantity is another. We had many move out, construction is still going on, and inventories will only get higher.

IMHO, you will see soon that there is not enough people to fill even these (future) affordable homes.

Is not even a issue of buyers on the sidelines, but houses for buyers that don't even exist.

Mark my words.

Diggin Deeper said...

"Is not even a issue of buyers on the sidelines, but houses for buyers that don't even exist"

SMF...Right on!

News item from AP...

S&P home index drops, 1st time since '91


"U.S. home prices fell 1.4 percent in the first quarter compared to a year ago, the first time since 1991 prices have shown a quarterly decline, according to a housing index released Tuesday by Standard & Poor's."

Nationally, it looks like we'll replay the early 90's but a little bit differently. The S&L Bailout occurred back then and it cost $150 Billion to bail it out about $240 B in todays dollars). Alt-A and subprime problems could be could be close to a $Trillion before all the dust clears.

IMHO, this all adds up to years of real estate troubles in the area. Homes boarded up, masses of families filing for bankruptcy, and layoffs coming in waves both in the public and private sector. Is the sky falling? Not if you're a renter. There will be great opportunities ahead for those that patiently await their chance to buy. And by the looks of Craigslist, you might even get a good break on the rent ie. ever rising inventory of rentals available.

smf said...

Let's also not forget how many speculative mansions are out there right now. And these are not cheap, nor the people speculating poor.

In EDH you can check Greenview Drive and Terracina.

95742 has wonderful examples.

Fair Oaks (95628) has several multi-million $$ mansions that have been sitting for a while.

Even (at least) two of the most expensive houses in Gold River are by flippers. And of course soon the GR condos shall be on the MLS.