Wednesday, August 29, 2007

From 'Making Lots of Money' to 'Waiting Tables at Denny's for $8 an Hour'

From the Sacramento Bee (hat tip Cymst & Fanchew):

The downturn in the housing market -- with job losses in the industry really kicking in during 2007 -- is starting to hit the region's breadwinners. "Job growth has slowed down quite a bit in the first months of 2007," said Howard Roth, chief economist at the California Department of Finance. "Construction, home sales -- it's all going down."

Which is not news to Rachel Brandon of Sacramento. She shook an emphatic "no" when asked Tuesday if she is better off than she was in 2005. "My career for the past 10 years was in the mortgage industry," said Brandon, who is 39. "I have a license to do loans. Two years ago I was making lots of money -- I was making deals in my pajamas from home. Now I'm waiting tables at Denny's for $8 an hour."

Still, she's optimistic. "I really like my job at Denny's," she said. "I'm learning quite a bit, and someday I'd like to have my own cafe. But, two years ago if you asked me if I'd be working for $8 an hour today, I'd have said 'God, no way.'"
From the Folsom Telegraph (hat tip Patski):
Folsom and El Dorado Hills seem somehow insulated from the recent shockwave of declining home sales reverberating through other parts of the Sacramento region.
...
Still, potential homebuyers in the area, spurred by the nationwide media blitz in regard to declining home sales, are more apt to take a hard stand in search of a real deal. "Some buyers have the mentality right now that they think they have to lowball on home sale offers," said Jeff Traxler, a realtor for REMAX Gold in El Dorado Hills..."The psychology of the buying public right now is that if they buy something they want a good deal," [Patrick] Hake [of REMAX Gold in Auburn] said. "A lot of people want to negotiate the asking price down. There are a lot of lowball offers going out, but most are being rejected.
...
Then there are buyers who believe they can predict when the real estate market will actually bottom out. "There are people trying to time and buy at the perfect moment," Hake said. "The few people who get lucky and do that will probably tell people how smart they are for the rest of their lives. But the truth is, the market could go back up for six months and then go right back down again."

As a general rule, real estate agents are trying to put a positive spin on the situation.
...
Although Folsom and El Dorado Hills home sales numbers have declined slightly, there's certainly no widespread panic among realtors in this area. 'It's certainly not a positive thing to see sales numbers go down," Hake said. "I'd much rather see the numbers go up. I'm not making the assertion that the market is increasing in Folsom by any means. I'm just making the assertion the Folsom market is not having as many problems as some of the other areas."
From the El Dorado Hills Telegraph:
Folsom and El Dorado Hills are located in the ninth worst market - the Sacramento metropolitan area - for home foreclosures nationwide, but they've been spared the carnage somewhat...Sacramento County saw 3,840 notices of default filed between April and June 2007, a 184 percent jump compared with the same quarter in 2006, reported DataQuick. El Dorado County, with 222 notices filed, saw a slightly smaller increase of 158 percent. But Jim Foster, who works with JM Morgan Funding in Folsom and lives in El Dorado Hills, said neither area was as hard hit as regions like Elk Grove, Lincoln, and South Sacramento.
...
When foreclosures do occur in Folsom, they're mostly among younger couples who financed their house with no payment down and adjustable-rate mortgages - the phenomenon that's rendered fast-growing areas like Elk Grove rife with lost homes...Foster knows of two or three Folsom couples in their 20's who allowed the bank to foreclose on their homes, opting to rent instead. "They weren't even behind on their mortgage," Foster said. "They just figured they could rent a house for half the payment, and twice the square footage."
...
El Dorado Hills is a slightly different animal, he said. On his own street, Powers Drive, Foster has watched foreclosures on at least two $1 million-plus homes in the past six months. "A lot of these people were dialed into real estate as mortgage brokers or builders and this industry has taken a big hit," he said. "Some are making one-tenth the money they made before."
From the Merced Sun-Star:
As usual, Merced's poverty rates ranked well above state and national averages, which both held steady at about 13 percent. What's different about this year's data is that Merced County is faring worse than its Central Valley neighbors.
...
Simon Weffer, a sociology professor at UC Merced, linked Merced's grimmer poverty picture in part to the recent housing boom and subsequent bust. Merced's building activity and home sales reached record highs in 2005, raising incomes and lowering poverty along the way. Now the slowdown is hitting Merced harder than its Central Valley neighbors. "It's important to realize that what's going on in Merced is not happening in other counties," said Weffer. "Part of it is that the housing market hasn't collapsed as badly in other counties.

72 comments:

buying time said...

It was the title of the Telegraph article that really annoyed me. "No worries for local realtors" If it wasn't clear before who their main audience and advertizer is....it should be now.

Patient Renter said...

"There are people trying to time and buy at the perfect moment," "But the truth is, the market could go back up for six months and then go right back down again."

Wrong. Over and over this argument is defeated, but these guy just feel the need to keep on making incorrect statements. Real estate market bottoms are quite easy to time, at least compared to peaks.

Exhibit A:

http://graphics8.nytimes.com/images/2005/08/21/business/21real.graphic.gif

Gwynster said...

Oh yes, a market that goes up 250% for no flipping reason will only decline by 12% so don't bother trying to time the market yada yada tada. These folks have all the financial veracity of Milkin.

If anything, yesterday's MHI data release confirmed that my suspisions wages are deflating and have been for a while. There is zero reason buy, period.

Diggin Deeper said...

"Real estate market bottoms are quite easy to time, at least compared to peaks."

And who the hell cares if you miss the 1st 10% appreciation once this thing bottoms? I'd rather lose 10 to make 30% than risk a dead cat bounce and lose another 20-30%.

People will say anything when desperate and agents who are solely dependent upon selling homes in this market are not far from desperation.

Imho, a market bottom will prove itself by rising at least 2 quarters back to back. Even then there will be hesitation.

smf said...

"There is zero reason buy, period."

And again, look at who is showing up at some of these auctions, people looking for a bargain 'investment' home.

End users are still essentially out of the housing market.

smf said...
This comment has been removed by the author.
Jacob said...

"They just figured they could rent a house for half the payment, and twice the square footage."

Plus no HOA, no property tax, no maintenance cost.

Nothing else to really say on this.

ralphk said...

Folsom is HELOC heaven whose time is coming. With a median household income of, I believe, under $80k there seems to be a disproportionate number of Harleys, Hummers and expensive boats to go along with those over priced houses....IMHO

Patrick Hake said...

The writer contacted me, I gave my opinion and he published it. How is that desperate?

I agree that the title of the story is overly optimistic. Then again I did not write it and therefore your beaf is with the author.

I have never advertised in the Telegraph and probably never will. Print advertising is no longer a relevant or cost effective medium.

My point regarding the market timing issue was not to say that we are at the bottom or that it is not prudent to wait, my point was that we will not know the bottom has happened until it has passed, and even then it could give us a head fake and turn down again.

As you are all aware the average and median price figures do not tell the whole story, when you say we have only had a 12% decline, compared to a 250% run up, I think the 12% is being too kind. Many homes have depriciated by much more than 12% since the peak.

That being said, regardless of any other predictions about future prices, Folsom has done better than other areas of Sacramento County. Volume has remained steady year over year and prices have come down slower than other areas. I realize this does not mean they will not come down further, but it at least shows that Folsom has the potential to fall less in the future and rebound earlier than other areas. When that is, I don't know.

I think there is is a tendancy to depict Realtors as ogres or idiots on this blog. While there certainly are Realtors who fit that description, there are many others who are do not. I tell it like I see it and let my clients make their own decisions. Has that cost me sales recently, yes, will it gain me peoples trust for future business, yes.

Full disclosure: I currently own a home, which I could sell relatively easily, being that I am in the business. I have not sold, because I hate to move, I have a great fixed interest rate, I hate having a land lord and I love where I live. I did sell a rental property I owned in Antelope in March 2005. It went up another $25k after I sold it, but it is now worth $45k less than what I sold it for. :)

Gwynster said...

OK I was able to get my data for 2000 to 2006 easily enough. What I'm still looking for is:

1971 through 1999, annual numbers by county (el Dorado, Place, Sacramento, Yolo)for
*Median Household Income
*Per capita, income
*Median Home Price.

I complied the first table (sac co 00-06) and it's pretty damning. I want to see all 3 population waves before I call absolute trend. If anyone has access to all the historical USC datasets, then I am your huckleberry.

Mike said...

There is really nothing magical about Folsom. It is only little bit better than Elk Grove in my opinion. Although some think Folsom is "All That"

Was just talking to someone who has wife working at Intel and they are shrinking. Sending off jobs to everywhere else (other countries). I am sure once the high paid Intel Employees are reduced, Folsom homes won't be in such demand and home prices will plummet as with other areas.

Bakersfield Bubble said...

"Volume has remained steady year over year and prices have come down slower than other areas"

I call BS on this. Volumes are down YOY.

Also, how many clients did you tell "it was a great time to buy" or "you better buy now or you will be priced out forever" or "etc." in 2004, 2005 & 2006?

nutter said...

I agree with RalphM's assessment. These edh and folsom folks are tapped out baby. I should know since I own a business here and see people starting to pinch the pennies. By the way, don't even start believing the false numbers for household income propagated by the bubble heads who would love you to buy in to the idea that it's in the 80 to 100k range. That may have been true prior to them relocating from the bay area when both of the spouses worked full time there. As soon as these families moved to folsom and edh, most often the husband or wife who had been canned back in the bay area becomes the stay-at-home parent. There are an amazing number of stay-at-home DADS in edh. You would be shocked like I was initially. The reason? Many of them lost their jobs back in the dot-com bust. These guys will never work again. Technology passes you by after just one or two years. "buying time"--I also agree. The local rag-sheets are simply mouthpieces for the advertisers. There's no real journalism in these things. These rags know exactly who is putting bread on their tables. I've spoken with numerous local realtors and have received a very different outlook than the clown bubble meisters in these articles. They tell me of home after home with sellers who won't reduce their prices. They don't complain about the few buyers that are looking but instead point their fingers at the real problem. Greedy greedy sellers. This will only lead to a more precipitous drop in prices when the seller psychology inevitably caves in about a year from now. Stealtors hate people who try to time the market since they make money only if you buy or sell NOW. It's always a good time to buy AND sell based on Stealtors "professional" opinions.

Bakersfield Bubble said...

Just added Folsom to the list of places that "are different"...

Bakersfield Bubble said...

You are 29. LOL. What did you do before you got into real estate?

You have never seen a downturn, buckle young chap its going to be a wild ride...

nutter said...

Also, keep in mind that places like folsom, edh, and roseville would just love to distance themselves from the sacramento "armpit" of ground zero for home depreciation and foreclosure. Heck, it makes headline news across the U.S. with all of the infested swimming pools and brown lawns. Unfortunately, these areas just aren't quite special enough to escape the slaughter in real estate. But the denials from the establishment that profits from propaganda with keep dishin' it out all the way to the bottom.

Patrick Hake said...

Bakersfield Bubble, I have no reason to B.S. you. I don't think I can change the direction of the market any more than I feel that I can change the weather.

May through July 2006: 213 single family home sales in Folsom

May through July 2007: 209 single family home sales in Folsom

These are sales recorded in Metrolist MLS, which do not include FSBO or new home sales.

So, based on the data I have access to, volume has remained steady in Folsom YOY.

A reason for this is that 2006 was a bad year for Folsom. We are now playing the game of measuring bad against bad. Volume is obviously down much more from the peak.

The more important statistic to me is the projected number of months inventory. The last time I checked there was 5.64 months inventory, based on (active folsom listings)/(Monthly average volume of May - July 2007 Folsom homes sales)

While this is definately in a buyer's market range, it is certainly a lot better than the county inventory level, which is closer to 12 months (Not Confirmed).

I don't mess with the numbers. I simply tabulate them and publish them.

Once again, I did not say the Sacramento market was improving. I said Folsom has (passed tense) done better than other areas of Sacramento County.

The article I wrote that the reporter contacted me from is: http://www.placercountyhomesandland.net/2007/08/folsom-homes-fo.html

The numbers are all there. Including my worries regarding the fall in sales from the February to April period and the fall in pending sales since August.

Bakersfield Bubble said...

More news of Denny's hiring:

Denny's Manager Shelba Rayburn said, "The job force in Ardmore seems to be, as you said, more jobs than there are people."

http://www.kten.com/Global/story.asp?S=6944822

Bakersfield Bubble said...

What about my second question?

Thanks

Patrick Hake said...

Bakersfield Bubble, I am 29. No arguing that. I think some credit should be given for not hiding behind an anonymous comment.

Prior to becoming a Realtor I was a student at Sacramento State (hardly Ivy League), where I obtained a B.A. in Economics.

While I am not old enough to have owned a home during the last market down turn, I was actively involved in it.

Both of my parents were in the real estate business at the time and are still in the business today.

As for the second question regarding how many people I told it was a great time to buy in 2004-2006.

I would say more in 2004 and early 2005. As 2005 came to an end, things changed. For those that were moving up, things got better. For those moving out of state or those selling to live off their apprecition, things got worse.

For those looking to buy as first time buyers, I have suggested that they only buy within their budget, get a fully amoritized fixed loan and then move in and enjoy.

As I stated in my first comment, I still own my own home, which I could sell at any time, but I choose not to.

Bakersfield Bubble said...

I take back my intial assessment. You seem like a pretty good guy and honest realtor.

Good luck!

Patrick Hake said...

Thanks Bakersfield Bubble, I just wanted to clear my name.

When I get phone calls from the press I am always reluctant to talk with them, but then I realize it is a chance to "set them straight".

To the reporter’s credit, he did not misquote me. However, it is difficult to put a 30 minute conversation into a few paragraphs and still keep it in context.

Cmyst said...

nutter said:
"There are an amazing number of stay-at-home DADS in edh."

Man, I'm glad you're confirming what the Sig Other (who is also a stay-at-home "Dad" to two small, demanding dogs) and I have noticed. Sig commented once that it seemed like every other car up here has some home business advert stuck to their back window. And while some of those businesses can probably support their owners, I have a lot of experience with such endeavors and I can almost guarantee that most of them are struggling.
This is highly speculative, but IMHO the main difference between the middle class and the working class or poor when it comes to starting home businesses is that the middle class has access to a lot more credit. I've known several people who would identify as middle or upper-middle class who have filed BK at least once. I have known zero working class or poor people who have. They tend to write bad checks and get thrown in jail, though.

mopar777 said...

Back in '02 or '03 I was doing some work at the office of a career realtor on Sutter Street in Folsom. She was on the phone with either the home inspector or the appraiser. She said something like: "So what do you think? - Oh really - needs to be bulldozed - OK"
THEN she calls up the (potential) buyer. "Just need some tender loving care, hon."
I am not making this up. As I said she is a career realtor who is now active in the Arden Arcade area.

Gwynster said...

"To the reporter’s credit, he did not misquote me. However, it is difficult to put a 30 minute conversation into a few paragraphs and still keep it in context"

That is why I'm in the middle of chart making madness

Patrick Hake said...

I have also chosen to do my own research. One DQ table a month and an occasional forecast from NAR or CAR is just not enough.

The funny part (or sad part) is that many in my industry would consider knowledge of just the DQ chart and association reports as being an expert.

Having now been the source for numerous news articles, I have learned that many reporters are hardly experts on the stories they write about.

They follow a simple system. Find a subject that involves pending doom, scandal or triumph over the odds and miracles. Get three sources, hopefully interviews, as written sources are too easy for people to fact check. Sprinkle in some numbers making sure to choose comparisons that make your pre-determined point. Give the article a shocking headline, either to the positive or negative extreme.

Turn it in by deadline and then repeat until retirement.

buying time said...

Patrick -

I certainly applaud you for braving this blog. Unlike many of your fellow Realtors, at least you look at the stats, and seem to understand them.

I work with numbers for a living, and know how badly they can mislead. For instance, the Folsom volume issue...my first thought when I read the article was that volume was down last year too so the comparison is a bit misleading.

But again...kudos for showing up. Its always nice to have some diversity of opinion.....and Sippn could probably use the company.

buying time said...

And yes, Folsom, EDH, Davis, East Sac, Granite Bay, Roseville, will all hold their value better than other areas. They were more expensive before the bubble, and they will remain more expensive after the bubble relative to other areas in Sacramento.

Diggin Deeper said...

Sentiment now controls this market driven by the media, inventory levels, and the credit debacle. These continue to be powerful influences requiring a positive and sustainable turnabout which is unlikely to occur anytime soon. As we've heard there will always be those who'll buy no matter what the conditions. That's a personal decision people make and they must accept the outcome.

All the graphs, news stories, articles, etc, list Sacramento and the San Joaquin valley near the top of the worst real estate markets in the country. Yup, that's encouragement to go out and write a check for the down.

With the onslaught of foreclosure, todate and projected over the next year,there's no reason to expect this market has chance to find a bottom until all this sorts out.

When buyers quit wanting to slam dumb offers in front of the sellers and start paying the asking price the market will have found equilibrium. Until then, I'd stay out its way.

wrong moves said...

Hi
Long time lurker, first time poster.

On the subject of numbers, I can not seem to make sense of some that I look at as being pertinent to me.

If you can believe the census, the average household incomes simply can not support the lifestyles I see my acquainances living. My wife and I make a combines (barely) six figure income and live fairly frugally. We DO pay ourselves first, so much of our money is saved. What is left simply can not buy even a "starter" home. Going by the old norms of 30% of gross, the calculators peg us around $280,000.00. No way will I put my family in what that money will buy.

Second, I have been tracking a few houses just to see the differences in asking price and sold price. I am disheartened to see that the average is only a 3.922% drop.

Anyway, I hope to chime in with something with an added value from time to time.

Diggin Deeper said...

Here are some stats you might want to question...

House price appreciation slowest since '97: OFHEO

http://news.yahoo.com/s/nm/20070830/bs_nm/usa_housing_prices_dc_2

Home prices rising in the US...Yup, they sure are albeit slowest rise in about a decade.

Gotta really question the data here.

Gwynster said...

Wrong moves,

Your dilema (which I share) is what I'm trying to establish along with population migration patterns in the 4 county area. I feel your pain, as we make less then you do and 220k to 240k will do nothing for us in Woodland or Davis. In 01', it would have bought us a reasonable starter home in our target areas.

Once I can get the basic concept into graphs, I figure I will no longer need to argue with listing agents as to why I should offer more for the crappy little house they are trying to unload. I can just point to the lovely pictures and quietly smile.

**insert cheesy plug for MHI, PCI and median home price data by county for 1971-1999**

buying time said...

FWIW The drop off in Folsom sales is much more than "slightly". You might be able to classify EDH in that bucket....

http://averagebuyer.blogspot.com/2007/08/july-dataquick-for-folsom-el-dorado.html

Patrick Hake said...

I wrote an article recently on my site regarding discounts from asking in Placer County: http://www.placercountyhomesandland.net/2007/07/how-much-will-t.html

The average discount on the 1,848 homes sold in Placer County between January and June 2007 was 2.9% and the median was 2.2%. 94.8% of the homes were sold within 90% of their asking price at the time of the offer. There were only 2 sales out the 1,848 that sold for less than 70% of their asking price, which were probably not arms length transactions.

When making an offer on a property, it can also be useful to do the same research on the listing agents past sales. Some agents will not have enough sales to perform the analysis, but for those with at least 10 to 15 sales you can determine the average and median discount they have negotiated. The agent's willingness to negotiate can affect the advice they give their sellers, which the sellers may or may not take. Some agents are immediately offended by low offers; others will handle it professionally and see if there is a middle ground that all parties can agree on. As in poker, it is nice to know the math first and then focus on the finer points of reading your opponents hand.

smf said...

I feel vindicated!!

Have you seen the latest from HBB? About how much problems speculators brought to this market?

http://thehousingbubbleblog.com/?p=3340

We are looking right now at AT LEAST 20% more housing than would have been required per normal population growth.

Patrick Hake said...

Buying Time, It does look like sales were off much more in Folsom when comparing July 2006 to July 2007.

I typically look at areas over 3 month periods. The data I used during my discussion with the reporter for the Telegraph was compiled by comparing May through July 2006 to May through July 2007.

Those numbers were:

May through July 2006: 213 single family home sales in Folsom

May through July 2007: 209 single family home sales in Folsom

Other than the sales figures in July, the bigger worry for Folsom is the fall in pending sales from 103 on 5/29 to 64 this morning and the increase in active listings from 366 on 5/29 to 388 this morning. Neither of these are positive changes and both are early evidence that the next time I look at Folsom in November, the sales figures will most likely be lower.

buying time said...

I gotta love a stat guy....Patrick you are on the right track. Looking at 3 month periods is the smart thing to do. I'm a "look at the trends" kinda gal myself. Individual data points can be influenced by too many things...especially with such small sample sizes.

Gwynster said...

SMF,

You should be proud. USC's american community project will give you Household formation data by county and break it down by wage groups. BEA and BLS will give you more construction industry data then you can shake a stick at. All you'd need to do is overlay the two with minor tweeks and voila!

I no longer have a copy of SAS or SPSS so I'm reduced to excel. Until my sets get really huge, that's not an issue. It just makes importing s l o w. I'd love to see what someone in the industry makes of the data.

Diggin Deeper said...

smf...I didn't think anyone challenged you on this?

It's no secret that realtors tend to isolate those areas that haven't experienced the
"problems" other areas are experiencing. If you look hard enough you can usually find a pariticular zip code that has held up for some reason with the usual realty speak as an explanation. We've seen it many times on this site.

I would agree with nutter. There's very little insulation between the burbs and Sacramento. To think that yesterday is the bellweather for today and next week is foolish and a bit naive. Sacramento is one of the nation's true epicenters for mortgage problems. Just because YOY one area held up better than most doesn't mean these area are immune to overall problem.

When prices fall in a sliding market its only a matter degree what the difference will be from one zip code to the next. And you better hope there are a couple of zips in between to break your fall.

Once again, truth or not, the agenda comes into play in order to keep bread on the table.

tough guy said...

Patrick, it's nice to get a fresh perspective. Given your age, degree, and insight I'd venture a guess that you have 10^10 times better of a chance of weathering this downturn over the countless other agents out there that got their licenses during the boom. I hope you frequent this blog in the future and share your thoughts.

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

Amber...I couldn't agree more as I wasn't very clear...the point was the only way buyers will get into a home these days, is to make ridiculous offers that sellers finally accept...and by the looks of things, sellers are still holding out for what they perceive as fair pricing. They depend upon the realtor to help them set the asking price so I guess you've got to throw the realtor into the culprit mix as well.

smf said...

"smf...I didn't think anyone challenged you on this?"

No, no one has. But in all the talk about prices, there was the forgotten issue of inventory.

I don't think there has EVER been such a level of speculative fever in housing, where as noted, the speculators never meant to be end users of their properties. And this is still not quite completely discussed.

We can all read about the fence sitters, as if there is only a simple cure to bring the market or at least heal it quickly.

But what do you do when you have houses that cannot be sold, not because of price, but because there are more houses than people to occupy them?

buying time said...

SMF -

I'll bite....if you lower your price enough, all houses will be sold because more people will quailfy to purchase (old law of supply and demand).

But will they ever get this low anytime soon...I kinda doubt it. At the very least population growth will eventually fill it.

smf said...

"if you lower your price enough, all houses will be sold because more people will quailfy to purchase."

I don't think so. If the population grew at (SWAG) 3%, and the housing stock grew at 4%, you have too many homes.

"At the very least population growth will eventually fill it."

Sure, but WHEN? And in the meantime, you have a house that provides no return on investment.

Diggin Deeper said...

In order for population to consume the excess, you need new businesses that pay real wages that are commensurate with housing costs in the area. I don't see that happening as Gwynster detailed a few months back that population in the area was really declining and not rising like everyone thought.

When you pile on the current inventory, the foreclosures, and the slice of the population that now cannot qualify for affordable home loans, it becomes an excess excess problem.

Qualified buyers have quite an array of choices out there right now. Too bad prices remain what they do.

Patrick Hake said...

Tough Guy, it is funny that you mention that. The title of the article in the Telegraph was "No Worries for Local Realtors".

When the reporter asked me how my business was going, I told him it was going fine. I also told him I was optimistic for my business over the next few years. He seemed surprised.

I explained that while the inventory of homes was increasing and sales are decreasing, the inventory of agents is falling almost as fast.

The migration from the old brick and morder delivery of real estate services to a more web focused delivery, has definately improved the longterm potential for my career.

This site has been a great resource. It could be my background in Economics, but I think it is probably something more. I love looking at imperical evidence for answers to questions. It annoys me when people want to make sweeping conclusions based on anecdotal evidence.

It is like having a crack team of analysts available 24/7 (That I don't have to pay:))

buying time said...

Maybe cause I am younger than most who frequent this blog...but I think the demand is there. Lots of folks still living with their parents, or multiple roomates cause they can't afford a place of their own. And don't forget, people will start moving back into the area if prices get low enough. After all Sacramento is a great place to live. =)

smf said...

Buying time:

Here it goes:

Investor - purchases an asset to receive a return for some period of time.

Speculator - purchases an asset to hold till that assets price goes up.

With the rise in prices, no one could hope to receive a return on investment (ROI) with rent alone. Hence, investors left the market long ago, and those who didn't became speculators.

Speculators never intended to become landlords, since their ROI was predicated on selling their asset at a higher price than their purchase price.

By most accounts, the level of speculation in the market was anywhere from 30-70%, depending on location and type. (Florida condos have a calculated 70% speculator purchases)

Builders built according to the speculator demand that was on top of normal market demand. Hence you can say that about 20%-60% more units were built than the typical demand would have justified.

This is not including the apartments that were built for those people who could not hope to purchase a home.

In my 18 years in the building industry, I saw about 2X-3X more housng construction in the bubble years than before.

And since population did not increase by that much, that is the overhang that will take years to get absorbed.

And the builders that don't go out of business will have to continue building, or disappear as well.

buying time said...

But the vacancy rate, which I consider to be true excess supply, is only around 3-4%. Granted this is probably at an all time high.

Otherwise houses are occupied by renters like me, who would love to buy if there price were right.

Not arguing with you...I just look at the data differently.

Patrick Hake said...

smf, I just read an article regarding the price elasticity of housing at: http://edpro.stanford.edu/Hanushek/files_det.asp?FileId=126

They determined that finding the price elasticity of housing is tuff, because a lot of assumptions have to made. The price elasticity of demand can only be calculated if you hold the price elasiticity of housing supply constant.

They conclude that in the short run, demand for housing is relatively inelastic, so you may be on to something. Over a longer period, demand becomes more elastic, and buyer demand will increase at a relatively larger rate due to price reductions.

Basically, if you lower prices tomorrow by 30%, it may not create an equivalent increase in volume, which would eat up the empty homes that were purchased by speculators. As time passes though, the drop in price will be noticed and may affect migration patterns, by keeping more of the natives here and by possibly encouraging new people to move to the area.

The article was written in 1980, so it is a bit dated, but the premise seems sound.

How long this will take is anyone's gues.

Gwynster said...

USC data is a lagging indicator of population growth by about 14 months. We saw the four counties surge in 00' so make that 98-99.
http://tinyurl.com/2jl5wv

We began our building spree at a time when the population was turning down. Having prices spike during that same period is the affect of speculation. You can hardly blame supply/demand or household economics for what happened.

The 4C area boomed because it was perceived as affordible. There is no other draw for this valley unless you are really a fan of sinus ailments, asthma, West Nile disease, and pot houses.

/hops off her soapbox

Gwynster said...

BT,

while going over data last night I came across the vacancy rate on rental properties in Placer:
05' 10.4%
06' 9.7%

I sh!t-hee-nay

I couldn't get them for 99 to 04 >; (

smf said...

"But the vacancy rate, which I consider to be true excess supply, is only around 3-4%."

But if the normal rate is 2%, you have a lot of vacant homes. And this does not include the houses that are temporarily out of the market, or the homes people purchased for their children to occupy while in university, or the builder inventory that is not in the MLS.

"The 4C area boomed because it was perceived as affordible."

Correct. Originally a lot of us did not see the bubble for a bubble, as we knew migration was occurring, prices had been sticky for a while, etc.

But overall the big draw to the central valley was always that the houses here were more affordable than other parts of California.

But that disappeared, and some still assumed that we would get the same level of migration, even though the houses became unaffordable to the majority of the population.

"How long this will take is anyone's guess"

No way to really know that for two reasons.

1. There is no real info on the level of excess inventory out there.
2. A global bubble of this scale has never occurred.

Diggin Deeper said...

buying time...

Who then picks up the excess inventory for rentals? It's like musical chairs with thousands of chairs left over. Every one gets the seat of their choice but the problem doesn't go away. In fact it gets worse because now the rental vacancy rates rise and drives the ROI on the rentals into the dirt. Rental rates compete for fewer renters and rents decrease making it more economical to rent than to buy.
Not to mention all the condos that will get converted to rentals because builders have overshot the market numbers.

It's a "no win" situation. Excess is excess and the only way it gets consumed is with a population (with jobs) increases and this would take time to achieve.

While I agree about Sacramento being a great place to live, it probably never will be considered that desireable because of its isolated location. It has no broad industry infrastructure, its out of the money corridors of California, and let's face it, the elements can be extreme compared to other locations.

So we're facing a situation where inventory levels will remain high unless there's some magical influx of people to take up the slack.

buying time said...

Wow, that's pretty serious excess supply, and is much worse than the numbers I had seen. I was SWAGing based on some WSJ national numbers I saw a month ago (which I doubled for Sac), and some SacBee zip data.

Okay SMF in the short run you win, but in the long run the law of supply and demand always holds.

Patrick Hake said...

Ceteris paribus, otherwise known as the escape hatch for bad economic forecasts.

The fact is that all things are rarily if ever equal, so it is imposible to predict the future using past results.

The best you can do is predict a mathmatically probable outcome and hope that the improbable does not occur. Unfortunately, improbable things seem to be happening at an increasing rate.

I think it is pretty clear that the old models or assumptions may be broken, at least temporarily.

buying time said...

DD -
The musical chairs issue is precisly why I look at vacancy. There are a lot of chairs filled with renters that are filling speculator houses.

But as G just pointed out...there are more empty chairs than I realized.

Okay...I gotta get some work done...

smf said...

"Okay SMF in the short run you win, but in the long run the law of supply and demand always holds."

There is nothing that I win here. For the sake of the future of Sacramento, balance needs to come back and prices need to come down.

The less people need to pay for housing, the more they can spend in other places.

The sooner this corrects, the sooner we can all get back to normal.

As some know, I already own a home. I 'could' have sold in 2005 to get a high price, rented, and waited for a better time to buy.

But we were not going to be part of the problem. So far, we are probably $150K down from the high price of our house.

Diggin Deeper said...

"So far, we are probably $150K down from the high price of our house"

Based on your past posts, it looks like you're down quite a bit more then reported decreases (off the highs) we've been hearing about. If your high was $600K that would be 25%. Are you certain its off that much? If so are we getting the true picture on the real prices in the marketplace?

smf said...

"Based on your past posts, it looks like you're down quite a bit more then reported decreases..."

Our area is pretty small and, hate to say this, special.

Not long ago, a 2558 sq.ft. home sold for $520K. Our house is a little smaller, but it is a custom home (with all the trimmings), built in 2002, and sits on .25 ac. We are assuming that we could have sold our house for $600K, based on comparables.

Another 2558 model just sold for $440K, with another sitting on the market for $360K.

But remember, we only took a $267K loan to buy the house. It is only paper gains that we have lost.

But in my ZIP code, I have seen some pretty bad (2003!) reductions already happening.

Off the top, I saw a house last year that went into foreclosure. It was bought at $343K and sold for $265K.

Patient Renter said...

Patrick said:

"The best you can do is predict a mathmatically probable outcome and hope that the improbable does not occur. Unfortunately, improbable things seem to be happening at an increasing rate."

I can only assume what you're referring to.. price drops? Nationwide median price drop? Subprime lending blowup? Record inventory? Record vacancy rates? All of this and more was predicted by many economists (such as Dean Baker), and seemed quite probable. Predicting what happens next isn't necessarily so hard.

Patrick Hake said...

There aboslutely are homes that are down much more than the the average and median shows. An example would be listing# 70086948 at 6521 Timberline Way in Rocklin. It sold for $650,000 on July 22nd, 2005. It is currently listed as a bank repo for $447,900. That is a 31% decrease from the peak.

With 3,184 square-feet it is now being offered at $141 per square-foot.

Oh and before anyone asks, it is not my listing.

Patrick Hake said...

Patient Renter, my point was not to say that there were not economists that correctly predicted the current downturn. My point was that there were a lot that did not predict it and supposedly they were using solid models.

Most would agree that the current situation is unlike any that has happened in the past, at least domestically.

Obviously there is a high posibility that prices will continue to go down. Simple supply and demand can tell us that.

The eventual conclusion of this debacle is what is in question.

How much will prices come down? How long will it take? How much collateral damage will there be?

These are the questions that seem difficult to answer with existing models. The quantitative answers are what seem to be out of reach.

I would love to give a well researched answer, holding into consideration all of the pertinant variables, to the questions of how long this downturn will last and how far prices will fall.

The problem is that any answers to these questions are, Ceteris paribus (Holding all other things equal).

My point is that nobody knows what will come next: interest rate cuts, bail outs, new loan programs, riots, war, earthquakes, etc..

Patient Renter said...

Fair enough. I just like to contain spreading any misconception that what has happened to date was improbable, or was difficult to predict. It was not.

The models that failed to predict this were all flawed, as is now being discovered. Indeed nobody knows how far things will go or how fast, but most of what has happened so far (price drops, inventory, forclosures, failed lenders), was disputed tooth and nail by most mainstream experts over the last few years, but was certainly easy for the rest of us to predict. Why this is? Who knows.

smf said...

I have to agree with Patrick, the variables are too great to figure out where this will end.

I mean, if the overhang causes prices to go down lower than imagined, there'll be a lot of happy buyers.

Some might take advantage of the excess to purchase assets on the cheap.

If a lot of immigrants are forced to leave due to lack of work, it may bode well for the remaining workers.

If people can now spend less on housing, they can spend more on other things.

etc.

Diggin Deeper said...

Looking at the big picture, I really doubt that Sacramento gets a pass regardless of suburb or neighborhood and imho, the price drops we've seen so far are basically tracking 1% per month.

This could change dramatically as we reflate the economy to offset the credit fears plaguing the finacial markets. Adding hundreds of billions of dollars to the discount window is just as inflationary as the Fed cut the short term discount rate. And the chances are pretty good that the Fed will try to stave off a recession by implementing a series of cuts during the next 6 months.

This inflationary pressure should have a negative affect on mortage holders and I believe that the ratio of NOD's to foreclosures will rise dramatically between now and mid 2008. By all accounts I read, the country faces nearly $1 Trillion in resets over the next year. If Sacramento is one of the highest foreclosure regions in the nation, today, there's little reason to believe it won't maintain this position over the course of the next year. Hell, it might even move up a notch or two during the process.

Something's got to give or distressed inventories will hit unprecedented levels, the likes we've yet to see in this marketplace. Imho, price breaks will be dramatic as sticker shock will force those, who've slid by up to this point, to either sell or foreclose. And I doubt that it will segregate between zip codes or neighborhoods. There were just as many jumbo loans done with no docs as there were ARMs. It will and has affected the McMansion people.

Sometime in mid '08 might just mark the low water point in the market, however, the deflation that occurs could permeate Sacramento far longer than most. After all, as SMF has shared, there are not enough buyers to consume the present and ever-expanding inventory out there. There is a tipping point where capitulation meets reason and sellers haven't quite gotten there yet.

norcaljeff said...

Wrong moves, welcome to the blog, you have a lot of company here :) I believe many of us are in the same boat as you, living conservatively, saving wisely and no overspending, and not willing to buy a home 4-6 times annual salary just to keep up with the Jones'. Time is on our side, stay patient and you'll be rewarded.

Cmyst said...

First, welcome all you new posters! Patrick, I'm beginning to warm up to you. You're no Agentbubble, but then, who is? Wrong moves, I'm in the same boat as you and Gwynster but at least our ship is seaworthy. I could have listened to a whole bunch of people, including ones who love me, and ended up right about now with ruined credit and no savings and losing my house. Because people who earn what we earn are "supposed" to own homes. And that is the problem.
It seems to me that the "models" everyone was using didn't correctly factor in the extent to which speculators were driving up the market AND causing an over-supply. And everyone was giving too much credence to statistics that didn't really mean very much on their own, such as that housing had never dropped in value and foreclosures had never risen when employment was high and there was no economic recession.
First, "employment" means nothing. I am employed whether I work at McD's or I am an MD.
Second, how much do any of us trust that we AREN'T in a recession? To paraphrase Twain: Lies, Damn Lies and Statistics. Sure, don't count energy, food and gas in that CPI. Don't count the underemployed and those (like my Siggy) who have given up in your employment statistics. Talk about "averages" and ignore the growing disparity between the super wealthy and everyone else when you talk about wages and income growth.
I think this was pretty easy to predict when people like me, Gwynster, and Wrong decided that we couldn't afford to buy while the strawberry pickers and waitresses were moving into 500K homes.

Gwynster said...

Ok I have to giggle. "Nobody saw this coming"? You obviously didn't talk to people in family or community development academics or researcher. They saw it in 01 & 02 and thought the correction would begin in 03. What they didn't see was the financial markets ability to keep the party going beyond all common sense.

norcaljeff said...

I can't get over the fact that all my friends in the Bay Area and most of my friends in Sacto keep telling me the same thing when we talk about the price of their homes: "If I had to buy my same home again at today's price, I couldn't afford it." Hmmmm, that's interesting. I wonder what percentage of current home owers are in that boat.
Not sure how the RE bulls explain that one. I guess my friends are all liars.