Sunday, June 03, 2007

"A Bleak Picture"

From the Modesto Bee:

A bleak picture was painted of the region’s housing market at a recent conference for real estate appraisers. The Appraisal Institute’s Northern California Chapter brought in experts to speak at the all-day event in Modesto last month, and their words weren’t cheery.
...
Home prices falling: The worst of the housing price slump may not be over.

"This year, we’re going to see prices drop in every market across the country for the first time since the Great Depression," said Steven Smith, a property appraiser and consultant from San Bernardino. Smith predicted that home values throughout the country will fall 25 percent to 50 percent below what they were at their peak, which was in 2005 or 2006, depending on the region.
...
"We have not hit the bottom yet in prices. There’s just too much inventory," said Glenn Race, sales manager for Prudential California Realty. "It will take time for the next recovery, perhaps four to five years."
...
"Subdivisions that should have sold out a year ago are still here," [Joanna] Terry [a senior manager for Hanley Wood Market Intelligence] said. She said each subdivision on average is selling only about 1½ homes per month in Stanislaus, one home in Merced and three homes in San Joaquin.
...
Realtors quitting: Membership is shrinking in the Central Valley Association of Realtors. Race said there were more than 3,300 members of the association in February 2006. But that declined to about 2,500 in February 2007 -- a drop of 800, or 24 percent. "Simply put," Race said, "there are not enough sales to sustain the large population of agents walking around with licenses."

13 comments:

Cmyst said...

I read this on Ben's blog earlier, and it was refreshing to see at least some mainstream real estate and economics professionals acknowledge the unreal inflation in housing prices and the inevitability of much of that being wiped out in the next few years.
I wrote a few days ago about real estate conversations in my extended family, and I got another earful over the weekend.
Turns out that the parents of another friend of the family just lost a custom-built home that they ended up going over budget on. They were intending to sell their current home and move to the new one, but current home did not sell.
They then attempted to sell new home, and new home did not sell, especially since it went over-budget and over-schedule in a failing market.
I'm not soliciting these stories. They usually begin, "Hey, did you hear about (insert name)?"
What's really alarming is that these are people that are solvent, solid, (one had imagined) intelligent.
I also got a clarification on the story I told earlier: not only did a former neighbor lose his home, he also lost a long-standing and formerly successful drain-cleaning business.

Diggin Deeper said...

This article reflects what basically been said on this blog for over a year now. Simple supply/demand economics working in a market that's in extreme oversupply... and growing. Finally we're beginning to see actual fallout numbers that will move quickly into all areas that supported this market during the boom. Periphery employment including mortgage lending, appraisors, home improvement, and construction related jobs are obviously taking a hit right along with the agent decline.

Momentum is building and sweeping buyer sentiment with it. To me it resembles the dot.com bust...same euphoria and blue sky attitude that resulted in highly overbought valuations which are still correcting today. At least in the stock market, one could tap a keystroke and get out. Real estate professionals want to uncouple their market from other equity markets and claim there are no similarities due to liquidity, the basic need for housing, demographics, etc. Unfortunaely, this real estate market is acting like any other...as it should.

Perfect Storm said...

Smith predicted that home values throughout the country will fall 25 percent to 50 percent below what they were at their peak, which was in 2005 or 2006, depending on the region.

Housing/Mortgage Doom 2007

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

lexi said...

This "honesty" thing is refreshing.
:)

paranoid renter said...

I don't think prices will drop 50%. What is more likely is that inflation will take off especially since the the dollar is weakening. Zillow is finally starting to show lower prices in the neighborhood in Roseville that I've been tracking. But they would still need to drop a good 30% before I feel like I did really well to not buy.

Jeremiah said...

An unsubstantiated rumor: An acquaintance in law enforcement recently let slip the belief that roughly 1/3 of homes in the Sac area priced above $350,000 were being used as marijuana grow operations. As the DEA continues its tear through these homes, I can only imagine this will further weaken the housing market.

If the Prop 215 people had only tied their campaign to neighborhood property values.....

Sippn said...

I think I'll ask my economist to appraise my property next time. (don't know if there is a bleaker housing place than SJ county and south.

Remember when comparing the dot.com bust with housing, dot.com stock in general didn't pay out much of a dividend, it was future growth speculation. Real Estate has a stop at the bottom based on rent and investment returns, also dealing with steadily growning demand from population, which was temporarily overshot.

Despite the known inventories of REO (bank owned property), watch for the rate of inventory growth in MLS listings to slow ... there is talk it is slowing in so cal.

Sippn said...

BTW, OC Register Lasner found a recent Wells Fargo analysis of building rates at our peak in 2005 vs the higher building rates in 1972... fastenating.

We weren't even close to population and household adjusted numbers. If this is true, with pricing adjustments that are happening now, the volume of this market could easily return in a year.

Gwynster said...

Except you don't account for people leaving the area. They sure aren't migrating into Sacramento anymore. Those golden inmigration years were 1999 to 2002.

The flow has definately turned.

smf said...

"Except you don't account for people leaving the area. They sure aren't migrating into Sacramento anymore. Those golden inmigration years were 1999 to 2002."

And they migrated to Sacramento for one reason (repeat after me):

LOWER PRICES! (keep repeating)

Once you eliminated a main reason for moving to Sacramento, the growth rate was meant to go down. But they built as if the growth rate was meant to continue increasing.

I don't have the complete figures in my head, but from personal experience (18 years in the business), we have designed 2X more housing per year since about 2000 as compared to prior years.

Diggin Deeper said...

Sippn said....

"Remember when comparing the dot.com bust with housing, dot.com stock in general didn't pay out much of a dividend, it was future growth speculation. Real Estate has a stop at the bottom based on rent and investment returns, also dealing with steadily growning demand from population, which was temporarily overshot."

Very little dividend with real estate when you consider depreciation, and rents that can barely meet the rate of inflation. And just what was the real estate boom years if it wasn't based on future growth speculation? Ah, the write-offs they say...but fail to mention you've got to pay to get to the write-offs.

Real estate investment returns....?

Here's something emailed to me this morning about real estate returns over the last 20 years.

“Twenty years worth of data from the S&P National Home Price Index show that the U.S. average annual home appreciation from 1987-2006 amounted to only 5.6%. Even in hot markets like Vegas and D.C., the gains barely topped 7% per year. And that's BEFORE adjusting for inflation and typical annual expenses, which can easily cut these ‘returns’ in half.
“Conversely, the S&P 500 increased in value an unadjusted 575% over this same period -- just under 10% compounded annually."

Gee, 20 years of data ought to constitute a fairly good picture...

I wonder if Sacto fits in with the rest of the US or a hot market like Las Vegas? In any event, the investment thesis doesn't look so good if these numbers are true...

As for growing population demand, I'd buy this if rent wasn't an option. Since it is viable when housing is over valued, that argument kind of goes away. Most everybody starts out a renter and then opts to buy when the time is right.

With all due respect, I don't think that one works, Sippn.

Sippn said...

If you look at real estate without any income or leverage, you are correct.

But, if you have to pay rent anyway, you might want to look at owning.

Leveraged with 20% down payment, the return using that same time period with that same 5.6% national appreciation is double what you state without looking at any rent or tax credits or any other ownership costs.... but we could call it a wash.

Now mixed in with that 20 year average annual appreciation rate of 5.6% is a lot of bad real estate with great stuff.

The bad stuff may sit at 0% for 10 years while the good stuff is on the better side of the average.

Diggin Deeper said...

Sippn...

"Leveraged with 20% down payment, the return using that same time period with that same 5.6% national appreciation is double what you state without looking at any rent or tax credits or any other ownership costs.... but we could call it a wash."

Works when prices are rising...but the opposite is true when prices fall.

I'd rather see home prices stop their descent, level off, and even start to rise before "leveraging" any money into this market.

Bottomline-

Buy as close to a bottom as you can...don't buy when all signs tell you that prices are likely to deteriorate further. Its a bad business decision no matter how you cut it up, and there are none of the above that indicate this market's stabilizing.