Wednesday, July 18, 2007

Forbes On Sacramento: Nation's 3rd Riskiest Housing Market

From Forbes:

Those looking to spin the real estate roulette wheel might want to steer clear of Miami. It ranks first on our list of the nation's riskiest real estate markets.

There, a high share of adjustable-rate mortgages, high vacancy rates and slumping prices still too elevated for the local populous means should long-term bond yields climb, interest rates jump or the housing crisis linger much longer, things could go from bad to worse.

Affairs are not much better farther north--or west. Following in Miami's wake are Orlando, Sacramento and San Francisco.
A high vacancy rate of 3.3%, which ranked 10th worst, the seventh highest price-to-earnings ratio despite consecutive quarters of falling prices, and a share of adjustable-rate mortgages in excess of 50% made Sacramento the riskiest investment in California.


smf said...

Not surprised at all.

Have noticed a few things lately.

Metrolist seems to finally indicate a higher level of inventory.

Have seen homes that disappeared last year come back to the market in two ways: 1. relisting with lower price, and 2. bought at 'cheap' prices last year and is now an attempted flip for higher price.

Or the better one, bought 'cheap' last year and now being foreclosed.

It also appears to me as if the high end of the market is starting to seize up as well, were there are plenty of houses and none show 'sale pending'.

This unwinding is going exactly like clockwork, with prices going crazy all the way up, and crazy all the way down.

I mean, crazy is when you are trying to sell a track home of the SAME SIZE AND TYPE as another one, yet you have an up to (what I have seen) $200K difference in price.

Diggin Deeper said...

Here in subprime central, all roads lead to the home of your dreams. Take your pick of one the finest selection of vacant foreclosed properies in the state of California. Not ready to buy just yet? No worries, wait a month and have an addtional 500 homes to choose from. You ask why homes aren't selling? Good question... the market in Sacramento defies all others. Sellers just can't see the handwriting on the wall. Take a chance...make that "Take or Leave It" offer. Make it so low you embarass yourself. Who knows, there's a good chance you're doing the seller a favor.

norcaljeff said...

I sent Lander an article showing some MLS listing are removing "days on market" stats. SoCal MLS did this only last week. The don't want the masses to have that kind of data.

rocklin renter said...

"Take a chance...make that "Take or Leave It" offer. Make it so low you embarass yourself. Who knows, there's a good chance you're doing the seller a favor."

I know two people presently doing this. They both are very well qualified and have LARGE sums of cash sitting on the sidelines, ready to go. No takers yet on their offers, but soon I am sure....

anon1137 said...

I don't think Forbes knows what they're doing if they think the risk for SF (#4) is somewhere between Sac (#3) and San Diego (#5). They need to go back and tweak their model until it passes the "common sense" test.

But at least they got another "list" type story out there - you have to click through about a hundred ads to read the list. Maybe that's the point, getting the ads out there, not the accuracy of the results.

Sippn said...

anon1137 - exactly!

Real estate - its the new sex.

Sippn said...

Norcal - well it is proprietary data that we are seeing - when you look from the SacBee site or Metrolist MLS site, its usu not there, but ZIP realty, Trulia and a few others take their propietary feed and let us civilians find out more data than they wanted out.

For something you're not paying for, you sure are demanding!

norcaljeff said...

Whatever Sippin. They'll certainly show you everything else for Free and I wasn't demanding anything at all. Your argument holds not water. But it did prove my theory that you're in the RE industry, no surprise there.

smf said...
This comment has been removed by a blog administrator.
Perfect Storm said...

• In Sacramento County, median sales prices for all homes have returned to September 2004 levels. At $329,500, they are 15 percent off their August 2005 high of $387,000, the firm reported.

Just a guess, but do you think Oak Park, South Sacramento, North Highlands, Del Paso Heights, and the Norwood area might be down lets say 30% from peak?

Housing/Mortgage Doom 2007.

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

Gwynster said...


Not yet. I looked a bit around the Med ctr area and prices seem to still be around mid 2004 with the REOs slightly lower. The return to 2004 levels seems to all over. The return to 2003 prices is next. I'll get back to being interested at 2002 prices.

If anything, it looks like we've had some people "buying in the dip" but there is just too much momentum built up and prices will still be heading down.

Diggin Deeper said...
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Diggin Deeper said...


And why wouldn't they want this proprietary information to leak to the general public? It seems no service has the ability to get the numbers right in a drowning market, for whatever reason. And who cares when the market's on fire and homes are selling at a rapid pace.

The first service to accurately develop the total inventory picture, including foreclosures, REO's, etc, would gain credibility with those they sell their subscriptions to, not to mention their ability to sell the data to any major media outlet that wants it.

If they're not divulging the information because of its impact on the market, that's another story, and would prove once again, how slippery this industry really is.

SacramentoCrash said...

The mortgage backed securities market is unraveling which will greatly reduce the amount of money chasing loans.

Less money means either less lending or much higher interest rates as the buyers of these mortgage backed securities become more risk adverse. More risk means higher rates required by investors.

It is going to get ugly before it gets better.

SacramentoCrash said...

Oh yeah, as Prince says party like its 1999.

That is where house values really should be (after you adjust for inflation) to track in with the lousy salaries being paid in this area.

Add lousy salaries to continued state budget impasses and you have a recipe for disaster.

Perfect Storm said...


I hate Prince, but I like your optimism, yes 1999 is very realistic.

Jeremiah said...

From today's Big Picture Blog: How we got here.

Thought you'd enjoy their write up.

Diggin Deeper said...

SacramentoCrash said...
"The mortgage backed securities market is unraveling which will greatly reduce the amount of money chasing loans."

It will be interesting to get the results from the investment banks this month. Their loss provisions should be a strong indicator of just how toxic some of these securities really are. Bear has some of the best minds in the business and they blew up two funds in about 30 days. I've really got to wonder about some these cowboys running hedge funds right now. They might not know how bad they are until there's a zero balance in the account.

Gwynster said...

Did anyone catch the the lead story on CNN money this morning?

"Losing the American dream"
The Dow is soaring, and the economy is growing. So why are so many Americans bearish? Fortune's Nina Easton looks at an economy where money is plentiful, but security scarce.


"Betting your home against Wall Street"
Borrowing money against your house to invest in stocks could yield long-term returns, but it comes with a huge risk, says Walter Updegrave.

Two pieces from the conservative side on why Wall street earnings are up but Main street earnings are down.

This is such a big story and yet no one really wants to get really into it.

ps. before anyone asks, I DO blame the shrub for all of it **winks**

Sippn said...

Diggn, G - (G - by the way its nice to see you back clear headed, etc.)

Bear Stearns and the increasing Dow - don't you think people are just looking for easy quick returns? These hedge funds were selling people derivatives of a margin product - 100% LTV subprime mortgages. Like a pyramyd scheme, the security only worked while investors were putting money in... was there an underlying value being created?

The Dow is being fluffed up because investors are only left with that option - creating some bubble here, too.

"Best minds"? I question the ethics of BS and their likes.

Diggin Deeper said...


Mortgaging homes to buy stocks. Didn't that happen at the end of the bubble?

We've gone from the bubble to the real estate bubble to the credit bubble that's financed the M&A activity and propelled the market.

Better to be defensive right now. When the public finances their way into the stock market, it's usually a good sign that things have topped out and are about to turn ugly.

Gwynster said...


You and I are of like minds regarding the markets... all that margin debt holding up the psychology. The analogy of fluffers works well. Now there is a visual.

Using the house to chase the Dow? Geez, that is so beyond layering risk with more risk- it's risk baklava.

Diggin Deeper said...
This comment has been removed by the author.
Diggin Deeper said...


You're right on! But this is no pyramid scheme as we've known in the past.

I'll try to explain. The pyramid investmeent is inverted with heavily leveraged synthetic paper at the top flowing down to the equity point that created it, at the bottom.

This paper is made up of Corporate bonds, Corporate loans, Motgaged backed prime, Mortgage backed subprime, and retail or Asset Backed Securities like credit cards, autos, unsecured debt, etc. It can also be ladened with investment grade paper as well. Keep in mind that $1 Billion in equity can create $20 Billion in synthetic paper.

Just as a bond will guarantee to pay off before a stock debt is paid, this investment acts the same way. Monthly cashflow travels from this half-cocked creation through levels of increasing risk from top to bottom, based on leverage. Think of it as an elevator on the top floor of a building loaded with cash it's just received from the synthetics for the month. The next floor down(called a tranche) a portion of the total cash is unloaded. The amount is based on the amount of leverage this floor has in the investment. Usually this floor can be paid anywhere from 30% to 100% of the total cashflow for the month depending on how much is in the elevator to begin with. The next floor down is also leveraged but not near as much, so it can receive 15-30% of the original starting cashflow. The elevator continues downward from floor to floor dropping off cash until reaches the bottom where the investor is waiting. The investor can receive anywhere from 0-3% or the total original cashflow for the month when the elevator reaches the bottom floor.

If the synthetics are rising they will produce enough cashflow each month to service the entire building and the investors on the first floor can make good money because of the leverage.

But if some of these notes fail at the top, and the investor is leveraged 20 to 1, it doesn't take but a 5% swing to the downside before the investor loses his $1Biilion. Of course the investment bank that leveraged the most and was nearest the top floor, probably comes away unscathed.

With enough subprime and retail paper out there, I've got to believe other failures are imminent.


Patient Renter said...

Dean Baker warns, get out your housing crash helmets.

Rents are FALLING according to the owners' equivalent rent (OER) measurement. You can deduce what this means. I'm surprised I didn't hear about this somewhere else first.

Patient Renter said...

I wanted to post this a while back but forgot... Dean Baker was on Talk of the Nation (NPR) a few weeks ago for a discussion about whether or not now is a good time to buy a home. Definately worth covering:

Patient Renter said...

I also forgot to mention, Ben Jones makes a guest appearance in that Talk of the Nation show :)

SacramentoCrash said...

Let's do the Limbo

How low can you go?!