Monday, June 11, 2007

Stung by the Sacramento Real Estate Market

From the Santa Cruz Sentinel:

When Howard Little got a call last year about refinancing, he decided the time was right to pull money out of his home in Boulder Creek to invest in real estate. He bought a house in Sacramento and figured he'd have steady rental payments to supplement his disability income.

Instead, he lost the property in Sacramento to foreclosure, and fell behind on payments for his own home. His credit rating dropped and he couldn't refinance. To avert the lender from foreclosing on his home in Boulder Creek, he put his five-bedroom, two-bath Boulder Creek home on the market, but with listings at all-time highs he hasn't found a buyer. He's dropped the price from $680,000 to $650,000 and now $630,000.

At 58, he doesn't want to give up the place his parents owned, the place where he and his wife raised their two children. He wishes he could go up to Sacramento to track down what went wrong there. He doesn't drive because of epileptic seizures, so he's been trying to get information via phone without much success.

"Where I'm going from here I don't know," he said.
From News10 (also video):
The numbers are startling.

Nearly 20 percent of Sacramento homes are worth less than the value of their mortgage. Some 3,400 Sacramento County property owners faced foreclosure in the first quarter of 2007, up nearly 200 percent from 2006. Sacramento County ranks in the top ten nationally in the number of foreclosures.
Real estate investor Tony Sedillo said while he can make money if the foreclosure trend continues, watching families leave their homes under the financial strain is excruciating to see.

"This one woman was paying $2,000 a month and is now paying $5,000 a month after a year," Sedillo said. "Who wants to profit when a little girl is looking out the window and the parents are packing up?"
From the Sacramento Business Journal:
While residential towers have seemingly stalled in downtown Sacramento, a San Diego developer with pension fund backing is seeking approval for a 24-story condominium tower on the West Sacramento riverfront.

Fairfield Residential LLC is looking to build a 150-unit development on about 1 acre between the pyramid-shaped Ziggurat building and the California State Teachers' Retirement System's new headquarters under construction.
Fairfield bought the property last year, but the developer said it's likely to wait until conditions are more favorable before building. "We're not going to rush into a bad market," said Dan Milich, development manager with Fairfield. "We're in a position to wait it out. If you're wondering about a groundbreaking, it's too early for that."

Fairfield would need to seek a construction loan to build the project, Milich said. Financing of pricey residential projects is scarce these days, judging from the delays and problems with Sacramento's other condo towers. A resurgent housing market, however, might lead to looser lending.
Large condo projects have not fared well in the past year. In Sacramento, there has been no word yet from the partners in The Towers on Capitol Mall project -- John Saca and the California Public Employees' Retirement System -- on what will happen with their plans to build twin 53-story condo towers. Saca has failed to come up with enough financing to satisfy the agreement with CalPERS, essentially putting the project on hold.

Craig Nassi, the developer of Aura, another high-rise condo tower in downtown Sacramento, has struggled to secure financing for the project since last fall.


Lander said...

"Nearly 20 percent of Sacramento homes are worth less than the value of their mortgage."

Or is it:

"Nearly 20 percent of Sacramento homes for sale are worth less than the value of their mortgage."

smf said...

Hard to tell about that 20% figure, as we don't really know the numbers of people who did not buy/refi/speculate, but simply used their house as an ATM.

Whatever it is, it is still too high of a number.

As for the West Sac condos, I only say one thing: HA!

Another fool that expects the market to 'come back' in 3 to 5 years. With a bubble of this magnitude, comparable to the mania, the wait will be way longer.

(Are we back to the heights of 2000 Nasdaq yet, 7 years after the fact?)

anon1137 said...
This comment has been removed by the author.
anon1137 said...

The $64K question is: How long will people continue paying on a mortgage that is greater in value than their home, even as their home sinks in value each quarter?

I don't think this has been thoroughly tested in the real world because during the last boom, the one that peaked in 1990, 100% financing was very rare and there wasn't even much HELOC activity going on . . . or at least not for 100% of the value of the home. And Zillow wasn't around either, so you couldn't get a daily reminder of your investing prowess. So, we shall see . . .

Also, in the photo of Mr. Little in the Sentinel, he is standing next to framed photos of his family and each one has some kind of bill (currency) in it - is that weird or what?

smf said...

"The $64K question is: How long will people continue paying on a mortgage that is greater in value than their home, even as their home sinks in value each quarter?"

I was thinking the same thing. From 90's bubble reminder, I knew of two houses, $180K and $140K. Their bottom was at $145K and $120K or so. So the overall equity loss was not so great.

But what if, using my house as an example, I was paying a $600K mortgage on a $450K (value right now, in the future probably less than $400K) house?

That's a lot of money to essentialy tie up in non-performing asset. I wonder how many would try to walk away from that type of burden?

chuck said...

Yep, long legged girls in Armani strapless step out of their Porsche convertible and hand the keys to the doorman...

"Will you be needing the car later Miss?"

"No thanks Herb, I'm just up the 33rd floor to freshen up a bit and then we're off to the Hmong Pig butchering and BarBque around the corner and then we'll sit on the street corner and watch the lowriders and hookers drive by..."

All in your "exclusive" high-rise West Sac Condo...

you betcha...

Patient Renter said...

smf said

"I wonder how many would try to walk away from that type of burden?"

More than in the 90s I'd suspect, but then we have the bank still trying to sell it for more than its worth. Somewhere someone has to wisen up and take the hit. I haven't really seen banks doing that so far.

Sippn said...

Now Chuck, that wasn't PC at all.

Lander, that was a good catch as I'll bet it is 20% of listed properties, but I get in trouble for shooting the messenger all the time.

Sippn said...

And the 1st guy in the story from Santa Cruz? Did the lender verify he had 3-6 months payments in the bank available? That plus foreclosure lag would have covered almost the whole year, but it didn't.

Is this a mortgage fraud story?

Do Not said...

hi guys!

is the market really that bad? i am in escrow for a house in natomas sacramento. after reading your blog it seems like i should pull out.

i just bought a home for $419k that is 2400 sq. feet on a 7000sq ft lot.

what do you guys think?

norcaljeff said...

"Nearly 20 percent of Sacramento homes for sale are worth less than the value of their mortgage."

Lander, I think it's more like 80 percent. It doesnt matter if they are for sale or not, the value is less than the mortgage in many cases, even less than the appraisers will admit. But Sippin, always trying to spin the bad news.
BTW, how many homes have you bought since 2005 since it's such a great market???? How many Davis homes have you bought since that market is invincible?

smf said...

"is the market really that bad?"

Yes, it is. But the $64K question is how bad is it?

(My background is in construction, and have dealt in residential construction for years)

The issue is first of all supply and demand.

There was a high demand for housing, with a restricted supply. This caused prices to go way up. Little by little, it was noticed that the increase in demand (anywhere from 20% to 70%) was due to speculation.

Speculation being defined as people who purchased a homes or homes for the purpose of selling it at a later date for a profit. These were homes that were not owner-occupied and were not meant to pencil out as an investment.

Remember, for a house to be an investment, your mortgage payment has to be LESS than the rent you can charge for it. It has not penciled out in the Sacramento area for years.

To continue on. The rush to 'flip' these homes went on and was profitable till the rise in prices could no longer be sustained. This stopped in June 2005.

At that time, you saw many of these 'investors' (speculators, really) now attempt to sell their 'investment' homes. Hence the incredible rise in inventory.

Now is when supply and demand kick in. A lot of the related industries 'assumed' and built aas if this demand was real, when it was not.

If the rise in demand was as now evidenced, not real, then it follows that the rise in prices was not based in reality either. Hence the slow return to normal prices, wherever that may be.

Now you have to realize that there is probably more housing out there than people to occupy it, and that will eventually make some new nieghborhoods eyesores in the future.

There are really very few houses (and only for those with money to afford them) that are really special enough to buy them NOW.

But a track home in North Natomas is not one of them.

norcaljeff said...

People continue to miss the fact that not only have people who bought homes/condos in the past 3 years lost money in RE, or lost money refinancing, but we are over looking something even more astounding: Every week people are buying homes TODAY at over priced levels and are still financing with ARM loans or even fixed rate loans that are a point or higher than they were a few years back. As rates go up it will push even more potential buyers to the sidelines because they will no longer be able to afford a home. Higher rates will also push prices down to cause more people to feel pain when they need to put the house up for sale and find they owe more than the home is worth. No one is learning from the mess that’s going on in the news. So we have people entering the RE market each day everyday continuing to contribute to a down RE market. And you have people like Sippin telling people it’s still a good market and misrepresenting how shitty the market truly is.

Sippn said...

Norcal Jeff - please cite where I said it was a good, time and we'll discuss it.

I just stated that the News10 quote was a screw up.

Not sure I would ever buy in Natomas.

Davis ... when your city council has been restricting growth for 20-30 years and the UC keeps throwing money at professors, I think it is a market worth examining.... certainly if you have a kid going to UCD, you would look at buying into a rental price range, selling out at graduation and comparing the costs to renting.... like any college town.... but I don't live there.

buying time said...

SMF or anyone else -

Speaking of track you know any details on the Blackstone development planned for El Dorado Hills, off Latrobe. I drive by it everyday...and I like the community concept (with the clubhouse) but can't figure out when they will post prices or actually be ready to sell.

Cmyst said...

Do Not:
I would not (and am not) buying for the time being. It seems to me, that prices are too high.
I would not buy in Natomas due to the flood risk, even if prices were rock bottom.
Some questions to consider:
Can you afford the payment on a 15 or 30 year fixed mortgage? Is the price of the house roughly 3 x your gross income? And lastly, there are a lot of homes in Natomas (and in much nicer areas without the flood risk) for rent. Look up any of a dozen property management websites, or Craigslist. Look at what similar homes are renting for. It wouldn't surprise me if they're renting for half of what your mortgage payment would be. You are not going to get that much of a tax break, nor are you likely to build up any equity in the home for the next few years, to justify paying twice as much for the same house if you are "buying" it vs. renting it.
However, I'm not a real estate expert or a lawyer, and this is my opinion only and the types of questions I have asked myself in the past 18 months.
(And, it's "tract" homes -- the spelling police strike again!)

norcaljeff said...

Sippin, I could spend my time looking for a direct quote but it's not worth it. You do a good job of placing doubt without coming out and saying "good time to buy." Typical sales/lawyer speak. You sound like a friend of mine who is a successful stock investor who didn't listen to my advice about Toll Brothers. He too, like you say about Davis, is that it can't/won't fall. He said rich people build houses no matter what, and yet the stock fell to 50% of its value. Davis has so many fans out there who are bullish tells me it can go down and it will. An 1800 sq.ft. house for like $700K is ricockulous. No one makes that kind of money to afford that mortgage, even on a profs salary. It's over bought.

Do Not- Natomas is on a floodplain. It has flooded several times out there since 1980. Additionally, if you really want to or need to buy, you should get the property for under $400K easily and without closing costs and with a finished back yard, but I wouldn't buy now. Rent first and see if you like the area.

Buying Time - What do you want to know? I have a few contacts who are familar with the area. here's the link:

Sippn said...

Now that was low - comparing me to a lawyer.

smf said...

"Speaking of track you know any details on the Blackstone development planned for El Dorado Hills, off Latrobe."

No, but last night I saw the first indications of prices going down to 2003 levels now.

Gwynster said...

Price are finally coming down in Davis as well as rents. Folks still out there with wishing prices just can't unload. We have our share of short sales and foreclosures and those aren't moving either. It's like the place came to a screaching halt.

In June of 07, UCD had 500 of it's employees retire in one month. I suspect the number is elevated because it's the academic year. However, 3% in one month is still an interesting number if you are watching the Davis demographic like I am.

I don't know of a single person who plans on staying in Davis after they retire. More significantly, the number of people who don't plan on staying in the US is high as well.

Between deaths, retirements, and parent's unloading Daddy houses, Davis is worth watching and not investing in.

ps to Cmyst - you're right. Going to certain events does make you forget about the bubble >; )

Do Not said...


i realize that its on a floodplain but i heard that the levy's are going to get fixed by 2009. So once they're fixed that should remove the req'd flood insurance.

where in sacramento are "safe" from flood plains?

if not sac what neighboring cities would you recommend?

Patient Renter said...

"Speaking of track you know any details on the Blackstone development planned for El Dorado Hills, off Latrobe."

I worked across the street from that development for a while. IMO, the party is over, and they're just a few hours late.

By the way, everything south of White Rock Road used to be Latrobe (thus, Latrobe road), until the landowners lobbied to have it renamed El Dorado Hills, for reasons you can obviously guess. Then it was the business park that was included, then the lame little tract homes east of the first business park entrance, and so on. Even parts of Cameron Park off Bass Lake were renamed as being in El Dorado Hills. Ever wonder why some residents of "El Dorado Hills" have 530 area codes?

It's like a monster that won't stop growing. (sorry for the mini-rant).

jonbonham said...

smf hit the cause of the bubble right on the head with speculators causing future pain for families across the globe forthcoming soon.
Just like the "for profit" healthcare insurance companies which has brought down the healthcare industry in this country to 30th in the world, the greed of "for profit" housing will do the same for "the american dream" as it is now turning it into a nightmare!

norcaljeff said...

Sippin, I compared you to a lawyer because, at least for now, it's not something in violations of Lander's policy :)

Do Not - Placer County, in my opinion, has everything you need. It flooded in the past in the very bad and low level areas of the South part of the County but they've already spent millions fixing this and its sustained large amounts of rain in the recent past. Natomas, Elk Grove, Laguna all have not fixed the problem yet and as you pointed out, maybe 2009 but who knows with the big budget problems the govt has right now. Plus, do you really want to wait two+ years for a possible fix? I'm sure insurance rates in these areas are huge. El Dorado County is nice too but maybe too far for you. You could buy in the Twelve Bridges area for $419K or less and its on higher ground than Lincoln Crossing. If you need to stay in Natomas for personal reasons or like the area, take all the advice of the people on this blog, sans Sippin: Just rent until 2009 and wait for the homes to go on sale. Can’t hurt, and if it does flood in the meantime, or when prices fall even further, it will be the landlord’s problem and not yours.

PR - good points on ElDo Hills, I've thought the very same things.