Sunday, August 19, 2007

From 'Biggest Boom' to 'Biggest Fall'?

From the Sacramento Bee:

Greater Sacramento's unemployment rose two-tenths of a point, to 5.4 percent. That followed an increase of four-tenths of a point in June...[W]hat was unusual was a 400-job decline in Sacramento's construction payrolls during what's normally the peak of the construction season. Also, the finance sector eliminated 100 jobs, reflecting cutbacks in mortgage lending and real estate.
On Thursday another big mortgage lender, First Magnus Financial Corp. of Tucson, Ariz., suspended operations. That will almost surely spell the end of First Magnus' Roseville office, which at one time employed 40 workers but recently had downsized to 16. "We're out of business," said branch manager Heather Fern-Luzzi. "With the crisis in the mortgage industry right now, there's not a lot of job openings in that industry." Fern-Luzzi said Magnus was the second mortgage firm to have suspended operations in the past two weeks in her office complex on Roseville's Douglas Boulevard, the center of the South Placer real estate industry. The other is Houston-based Aegis Mortgage Corp.
From the Sacramento Business Journal:
Construction -- once the fastest-growing industry during the housing boom -- dropped by 400 positions in July, unusual for the often-busy summer building activity. Many homebuilders, feeling the effect of the housing slowdown, have laid off construction workers in recent months. The dismal housing market has pounded the construction and the financial services industry during the past year. The region has about 3,100 fewer construction employees -- a 4.3 percent drop -- and 700 fewer mortgage and real estate professionals than a year ago, according to the monthly report.
From the Modesto Bee:
Stanislaus County's unemployment rate rose to 8.7 percent in July, up from 8.2 percent the previous year, according to state statistics released Friday. The bump is consistent throughout the Northern San Joaquin Valley and foothills, where all six counties saw year-to-year increases in unemployment...The housing slowdown is taking its toll on San Joaquin County, where several sectors tied to the real estate market are struggling. San Joaquin County was down 700 construction jobs from the previous year, Potter said. Professional and business services, including title companies, lost about 500 jobs. The finance and insurance sector, such as mortgage companies, was down 200 jobs.
From ABC 30:
The latest numbers from the Employment Development Department show about 9,900 people were unemployed in Merced County last month. That's 600 more than the same time last year. Local officials say the struggling housing market is partly to blame for the high unemployment rate. Frank Quintero, City of Merced Development Manager says, "With the slow down in construction, we've seen the drop as many as 500 drops in that trade....
From the Redding Record Searchlight:
Two years ago, business was thriving at Carmona's Appliance Center as the Redding retailer catered to new subdivisions and rode the real estate boom. The boom has fizzled and with it the demand for refrigerators and stoves in new homes...A year ago, Heslin's store delivered appliances to as many as 20 houses a month. "Now we are lucky to see 10," Heslin said, adding that he hasn't needed to lay off any employees but has lowered inventory and cut the store's advertising budget. "The Northern California market is in a slowdown and Sacramento is at a standstill," Heslin said.

The drop in home construction has prompted the Western Wood Products Association, which represents manufacturers in 12 Western states and Alaska, to revise its economic forecast. In the spring, the trade group predicted the demand for lumber would pick up next year. It "may be until 2009 before we see any type of significant recovery," Western Wood Products Association spokesman Butch Bernhardt said.
Construction jobs in Shasta County last month fell to 5,200 from 5,600 a year ago. The number of real estate jobs dropped to 800 last month from 1,200 in July 2006.
[F]urther signs of unrest in the housing market came last month when Benchmark Real Estate Mortgage in Redding went out of business after filing for bankruptcy. Bankruptcy filings in Shasta County in the first half of 2007 were up 39 percent -- 114 to 159 -- from a year ago, according to court records. Filings in U.S. District Eastern Court Sacramento Division, which includes Shasta County, were up 115 percent -- 2,327 to 4,996 -- in the first half of 2007.

Redding bankruptcy attorney Dennis Cowan blames the spike on the subprime mortgage crisis. "We're swamped with calls," Cowan said Friday. "They want to know how they can save their house. Many realize they made a mistake but others claim they were misled."

Cowan said he has had about five real estate agents file for bankruptcy through his office in the past six months.
Cowan has been a bankruptcy attorney in Shasta County for more than 40 years. He thinks the housing downturn is another cycle. "The boom we had this time was the biggest boom I had ever seen, so it will lead possibly to the biggest fall," Cowan said.
From the Washington Post:
Research suggests that severe financial crises tend to follow the rapid expansion of credit. The longer the credit boom endures, the more severe the hangover. Furthermore, because real estate is not liquid and the process of foreclosing on defaulted mortgage loans is time-consuming (as well as politically problematic), the economic downturns that follow property booms tend to be deeper and to last longer.

The experience of the U.S. economy after the 1920s and that of Japan in the 1990s appears to confirm these findings. In both instances, the period of credit expansion lasted several years, largely involved real estate speculation, and came to involve much of the population, whether that meant plunging into American stocks with borrowed money in 1929 or buying Tokyo condos with 100-year mortgages in the late 1980s.
There's a good chance that the current panic will give way to a full-blown economic crisis. That's because the credit boom has been going on for five frenetic years and virtually everyone has become involved, either directly or indirectly. An increasing number of businesses, from motorcycle retailers to cellphone operators, are finding their sales affected by the subprime debacle, according to the Web site Household spending continues to exceed income by a large margin. If credit stops flowing to consumers, the economy is bound to suffer.

Many people, including Treasury Secretary Paulson, believe that the financial system is robust enough to weather the crisis. It's true that, after many fat years, banks have lots of capital. But that was also the case in October 1929.


Diggin Deeper said...

It just shows how typical this market is to any other over bought and over extended one. Straight up for 5 or 6 years equals straight down until prices find equilibrium with market buyers. So far, buyers continue to resist, and sellers are being pressured to respond with lower pricing. In the end its the buyer that wins.

Went to an open house in the Fab Forties on Sunday. Home was just under 2300 sq ft, 5 bedrooms, small kitchen, and not really all that much character. It was sparsely staged, priced at $1.08 Mil, with a bubbly agent. My wife got to the kitchen and wanted to leave. She was a successful real estate agent for many years before the boom. Judging by her
"perception", no way this home gets the Mil its looking for. $470 per sq ft? Not for that one.

Patient Renter said...

Man, what WAPO article was excellent. Thanks for posting that. There's not much else to say.