Tuesday, September 18, 2007

Central Valley Slaughterhouse

From the Central Valley Business Times:

A total of 243,947 foreclosure filings -- default notices, auction sale notices and bank repossessions – were reported in August, up 36 percent from July and up 115 percent from August 2006, according to RealtyTrac Inc., an Irvine-based foreclosure information company.
Modesto has the nation's highest metro foreclosure rate -- one foreclosure filing for every 79 households -- followed by Stockton and Merced. Other California cities in the top 10 included Vallejo-Fairfield at No. 5, Riverside-San Bernardino at No. 6 and Sacramento at No. 7.
From the Modesto Bee:
The housing market news just keeps getting worse for the Northern San Joaquin Valley. Stanislaus, San Joaquin and Merced counties had the highest foreclosure rates in the country during August. Statistics released today by RealtyTrac showed the valley's homeowners were six times more likely to be in mortgage default last month than the national average.
"It's amazing to me how those foreclosure numbers continue to go up in your region," said Daren Blomquist, a spokesman for RealtyTrac, which publishes a national database of foreclosure and bank-owned properties. "Your notices of default (the first step in the foreclosure process) don't seem to be decreasing, which indicates you've still got some more pain to go through, unfortunately."
[H]ome values have plunged. August statistics show home prices fell about 15 percent in Stanislaus and San Joaquin counties and nearly 20 percent in Merced County compared with a year ago, according to DataQuick Information Systems...[In] Patterson...median home sales prices have plunged nearly 33 percent during the past year, according to DataQuick records. Waterford and Atwater prices dropped 24 percent, Lathrop fell 23 percent and Newman declined 22 percent. Prices in central, western and southern Modesto decreased more than 20 percent.
From the Modesto Bee:
Modesto planning commissioners Monday didn't try to hide their enthusiasm for a project that could bring the first new housing to the city's downtown in decades. They unanimously signed off on a zoning change that would allow Huff Construction of Modesto to build an eight-story office and condominium tower at 14th and J streets...Huff Construction's plans call for 45 residences in the tower's upper five floors.
Evan Porges, 38, told the commission the proposal would fill a need in the city's housing market..."It's time for Modesto to take the next leap in becoming a great city," Porges said.
Matt Oliver, a San Mateo development consultant working with Mayol and Barringer...Oliver told the commission the builders plan to move quickly on the project, but they could be delayed by an uncertain financial market.
From MarketWatch:
The NAHB/Wells Fargo housing market index fell two points in September to 20, matching the all-time low for the index set in January 1991. The index, which gauges builder sentiment, dates back to 1985.
There was nothing hopeful in the September report. All three components of the home builders' index were at cyclical lows, with two of them at all-time lows. Confidence fell to cyclical lows in all four regions of the country, with the biggest decline coming in the West.

The most-forward looking part of the index -- expected sales of single-family homes -- fell by five points to 26, obliterating the all-time low of 31 set in August. The index for current sales of single-family homes fell from 22 in August to 20 in September, the lowest since 19 in January 1991. The index for traffic of prospective buyers was steady at 16 in September, matching the all-time low set in December 1990 and August 2007.


Sippn said...

Well got my answer today elsewhere. . . Realty Trac actually reports each notice separately, at least 3 by the time a home is foreclosed, maybe 5 if there's a 2nd.

"one foreclosure filing for every 79 households" doesn't mean one foreclosure per 79 households. but it got the news hook.

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

Hmmmmm...think Bernanke let the cat out of the proverbial bag today...kind of shouted across the pond that we have a bit of problem in our real estate and credit markets....He'll win no economic prize for caving in to Wall St...He basically opened every spigot he can to douse this fire...now.

If you believed that this real estate bubble was harmless and contained, then you'll also believe that dramatic discount and short rate cuts will solve the problem...

Sippn said...

Who needs a prize when he just handed his predecessor a nice book boost and multiple speaking opportunities. . . pass the hat to the next guy.

Perfect Storm said...

You can’t refi an upside-down house, especially in todays tight credit market. Most folks who bought in the last two years, or MEWed their equity away, are unable to refinance, period. Rates could drop to zero and they’d be on the outside looking in.

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


Foreclosures are but a sliver in this toxic pie...it's what makes news...main street America duped into signing bad loans and now they're in trouble...I don't care how they count them, or how many chances they get changing the data until its right.

This bubble has gone global...and the suit and tie crowd Washington are pulling out all the stops to plug the financial leaks that are popping from London to Paris to New York. Foreclosures may make up hundreds of billions of dollars worth of problems that directly affect the US consumer.

Whatever the number is, its dwarfed by the $Trillions at stake on the world front in the form of AAA backed paper that no one wants to touch.

paranoid renter said...

Basically we'll now have inflation as our savings become worthless and rents catch up...real fast!

Patrick Hake said...


Do you guys think the drop in interest rates will have any lasting effect on the Sacramento market?

Will it cause the bleeding to stop sooner, or is this like using a Fred Flintstone foot brake, while careening down Donner Summit in a blizzard with no breaks?

I think it will help marginally, but I am catching a bit of skepticism from most of you on this.

anon1137 said...

My 401k got a big boost in value today, but I think in any other currency than $US, I'm in the same place I was yesterday.

I don't think the rate cut affects the big picture, in terms of real estate. Maybe it hits the pause button for a few months at most - maybe it will take until January to get where we would have gotten in October.

Since so much of our economy depends on spending, consumer psychology is everything, and a rate cut tells people to go out and spend.

wont said...


I have been a potential buyer for the last two years and am now sitting on a pile of liquid assets. There is no way I would buy in this market, not until at least 2009, no matter how low the interest rate goes.

And I am not the only one.

The reason: Nobody wants to catch a falling knife. The price trend is set by supply and demand. Supply is skyrocketing, and demand has dried up. I see at least two reasons why the demand is dried up: (1) for those without the money, they can't qualify for loans, no matter how cheap the money is. (2) for those with money, they are smart enough not to make a move in this collapsing market, where one year can wipe out your entire down payment.

However, the drop in interest rate would help the economy in general, especially corporate America. Another reason to put my money in mutual funds/stocks.

Diggin Deeper said...

"Do you guys think the drop in interest rates will have any lasting effect on the Sacramento market?"

Little affect on the Sacramento market...

To me, its a dangerous move by the Fed. People put too much emphasis on the net affect the Fed has on the economy. When the news hit CNBC, you'd thought we'd captured Osama Bin Laden.

Will treasury rates trend down due to the rate cut and save the economy from the real estate and the credit markets? Maybe not. The Fed has abandoned the dollar. The dollar index is at an all time low and this move does nothing to stop its fall. In fact it basically says, "To hell with the dollar, bring on inflation". A very dangerous move, especially for those who can hardly make their mortgage payments to begin with, and it could certainly put the brakes on those who thought they could afford home ownership, all costs considered.

The trend in the dollar was pretty clear before the cut and is 20/20 now. And while this cut should help foreigners currently holding treasuries, they certainly aren't going to be too excited about buying future treasuries at lower rates. We need them to continue to buy $70-80B per month in order to finance our debt. If anything, rates will have to rise to account for the added risks our economy poses on the rest of the world. If nothing else, to account for the further value losses of the dollar.

This move has basically greenlighted oil to make a run at $100 bbl, maybe even more. While most don't consider this to be a threat, I believe it will take down an already debt burdened public. Again, all related to the dollars value.

Basically, Sacramento will have to continue to deal with its real estate excesses. A panicky Fed did nothing more than push recovery out further by allowing inflation to take up any savings a rate cut will provide.

ralphk said...

It's my understanding that most ARMS are tied to LIBOR. The rate cut will have little effect other than a temporary feel good...then reality will set in next month with the massive resets.

Patrick Hake said...

So the consensus seems to be that the rate cuts may provide momentary relief, but they come with the risk of long term inflation and possibly stagflation.


You said that you would not buy no matter how low the interest rates go. Is this because you are not planning on holding the property for an extended period?

It seems to me the real price of real estate is a function of asking price and interest rate. Over a 30 year period a $300,000 loan at 6.75% would cost you over $200,000 in interest, if you factor in a 3% inflation rate.

If the rate went to 0 the whole world would want to buy at current prices.

We have heard of interest only loand, but imagine principal only loans. That would be nice :)

That being said, rates will never be zero. The fed does not have the power to make rates zero in a free market. But every little bit they drop will lower the effective price of each property on the market.

Diggin Deeper said...

"If the rate went to 0 the whole world would want to buy at current prices."

Not necessarily...The Japanese dropped their rates to .5% during their 90's recession. Real estate stayed in the tank for over 15 years. They were savers, they had a trade surplusses, and they didn't have near the debt we do as consumers or as a government.

The whole "rest of the world" might end up owning a huge chunk of US real estate because the dollar is so cheap.It isn't cheap to us because we have to live with it day in day out.

You are assuming that the Fed has the power to control interest rates charged by lending instituions...they don't. And just because they lower the discount rate doesn't mean credit becomes instantly available to the consumer. We've seen credit requirements tightening and forcing many "would be at the right time" buyers to the sidelines. You also assume that buyers will jump into the market if these rates go down. Not if prices don't go down to meet their value criteria. And furthermore who says they're going down for any length of time? If I'm not mistaken the rate on the long bond went up yesterday and prices went down.

People are not gullible enough to jump into something they can't get out of without at least capturing all of their down payment back. We're still in a very mobil society and the thought of having to move before the market bottoms doesn't set well with potential buyers. We've cut out most of "I didn't know what I was signing crowd" and what's left is a well informed buyer who's not about to make a mistake. Why should they? There's nothing in this market that indicates they should buy.

Patrick Hake said...

I agree with you Diggin. As I said "The fed does not have the power to make rates zero in a free market"

The Federal Funds rate will only effect short term rates.

Fixed mortgage rates will be determined by supply and demand, which will be determined by the markets long term outlook.

As for whether or not lower interest rates will make people want to buy, you are correct as well.

Interest rates alone will not make people want to buy. They are only one variable in a complex function.

That being said, lower interest rates will increase the demand for housing, holding all other variables constant.

RMB said...


At this point I am going to differ with you. With the run up over the last 5 years, homes are so far outside of people's affordability range that that "just" dropping interest rates will not cause an increase in demand for housing. You would have to bring back the mortgage madness that fueled the boom. Barring that coming back the market is going to continue to slide, regardless of what the fed does until the long term trendline is hit. This will be a combo of price drops and inflation. Check out the NY times graph from a few weeks ago that shows this has been the case for the last 50+ years.

smf said...

A drop in interest rate will not help those who took out loans that don't pay the principal amount yet.

Patrick Hake said...


I agree, just lowering interest rates a half point will not bring back the market, nor will it cause a wholesale change in buyer sentiment.

My point is that generally speaking demand will be higher with lower interest rates, than it was with higher interest rates.

For home owners it can be viewed as positive news. For those waiting to buy at the bottom, it could be viewed as bad news I guess.

When the time comes for you to buy, do you want a higher or a lower interest rate?

smf said...

"When the time comes for you to buy, do you want a higher or a lower interest rate?"

I take the lower price for the house. Works better in the long term. HIgher interest rate works better for some (us) due to the income we make.

Jacob said...

Lower interest rates are better for sure if you are getting a normal mortgage. If you still have a teaser rate then it doesn't really help you out.

Over the past couple years, who have been the most buyers? There are the speculators, sub prime/interest/neg amort etc. buyers, and the normal 15/30 year fixed fully amort'ed loan buyers.

I'm not sure what those percents are. But if say flippers were 25% and exotic loans were 50% then right now 75% of the potential buyers are gone for a long time.

There are very few investors left and all those exotic loan lenders are gone so that takes out a large pool of potential buyers.

Now what you have left are people that can afford a certain price and we need to get to that price through price cuts on the houses or increases in wages.

As for the rest of the economy, so much spending was financed from paper profits on homes (new cars, vacations, big screen TVs etc.) that even a drop in interest wont jump start people spending.

Sacto EJ said...

"When the time comes for you to buy, do you want a higher or a lower interest rate?"

Personally - HIGHER!

A very high rate would be best for a buyer with means and steady work. Prices drop when rates go up. This is the opposite effect we saw during the bubble.

As a buyer, I want the cheapest prices I can get. Financing the purchase comes next, and I'll qualify. You can always pay it down aggressively or refinance when sanity returns, but you can never renegotiate you purchase price.

BMac said...

I interviewed 22 people in Modesto yesterday. Thanks to the Real Estate Implosion, I got better turnout, and generally speaking, better educated, better qualified applicants than I have seen in the three years I've been up here. Solid people who were pumped about a chance at a solid entry level job.

Diggin Deeper said...


Liken it to buying a new car.

The car salesman says "What do you want your payments to be?" If you fall prey to that tactic, your interest rate will be higher, the time period to pay longer, and the price you pay highest possible. You're upside-down well after the wheels start falling off.

Demand will create itself based on supply constraints. Assuming mortgage rates go down, the added inflationary pressures will balance out the affordability proforma. Therefore no increase in actual demand. And the assumption rates will fall is based on a whole lot of factors pointing in the opposite direction. Rates rise and fall to mirror risks. Right now we have a higher more volatile risk package to deal with. It wouldn't take much to force rates higher regardless of what the Fed's intentions are.

Patrick Hake said...

I can see what you are saying Sacto EJ.

If a buyer is planning on buying a home with a large downpayment or cash, or if the buyer is planning on paying off the mortgage quickly, the interest rate is of less importance. Mainly because they are borrowing less or are borrowing it for a shorter period of time.

Most 1st time buyers do not have the cash or the income to take that path. This is the case now and it will be the case if prices go lower. People tend to buy at the limits of their qualifications. If the market goes lower, they will probably spend the same amount they would today, but they will just buy a bigger home or a home in a nicer neighborhood.

So long as a buyer is planning on making a leveraged purchase with little or nothing down and is planning on paying the home off over 30 years at the amortorized payment rate, the interest rate is extremely important in determining the total cost for the home.

Compound interest is very powerful. A small change in rate can make a huge difference in total interest payed over the life of a loan.

Diggin Deeper said...

Congress asked to lift debt limit.


Seems we just can't get a handle on what it takes to finance the country...

Now what happens to the price of treasuries and the interest rates if we don't get this increase from Congress...

Patrick Hake said...


I think your argument is that lowering interest rates will cause inflation, which will devalue the dollar and therefore raise nominal prices of housing, but will not stop the inflation adjusted value of housing from falling.

Man, when you start mixing, micro economics (individual buyer behaviour) with macro economics (GDP, Inflation, Employment) and then sprinkle in some Monetary Policy, it becomes a bit like spinning plates. Actually, it is more like whack-a-mole. You corner one variable, whack, and then up pops another, whack.

I find that many arguments change, once you start talking real dollars. This is true for housing, oil or any other item you could buy for cheap in the good ol' days.

Sippn said...

Hey picture Patrick - you might find it easier to beat your head against a rock than try to make a point.

Jacob - the flippers/speculators were the ones using the teaser loans. So their total is less than 50%,likely 25-35% of buyers at peak.

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

No, imho, nominal prices increase won't happen right away.

Patrick if you're angling toward an argument that prices will rise due to inflation, I'd say that works in a balnaced and normal market. In a bubble market prices dramatically rose by artificial factors like greed, overzealous speculation, and bogus demand. These price excesses get washed out in a correction. I'll buy using inflation to break the fall but only after a bottom is put in. Sentiment has a way of over- compensating for highs and lows...

Patrick Hake said...


It does kind of feel like we are arguing whether or not gravity makes things go up or down.

I enjoy the discussion anyways.

I have always liked a good discussion-debate-argument-MMA fight.

I'm not really here to change anyones mind. I'm here to take part in a discussion with viewpoints I might not here in my regular social circles.

Patrick Hake said...


I think it may be the fact that we are having this discussion via comments on a blog, rather than being able to speak face to face, but something is getting lost in the translation.

How will lowering interest rates effect the market?

A) Will it do nothing of consequence?

B) Will it cause the eventual bottom to be lower than if interest rates were left the same or increased?

C) Will it increase the eventual bottom price, due to increased buyer purchasing power?

or D) Will dropping interest rates turn the market around within the near future?

My vote is for C. I don't think lower interest rates will turn the market around on their own, but I do think they will increase the eventual bottom price and possibly cause the bottom to be reached sooner. When that is, I cannot say.

smf said...

And still in all these discussions the missing part is the large amount of inventory available.

Again, if 40% of the houses here were sold to people with no intention of ever living in them, it follows that this is housing that has no chance of ever getting an occupant, regardless of price point.

And since this demand was false, so was the rise in prices

wont said...


I am not an expert in either macro or micro economics. I simply do my math and try to be as rational as possible. Here is my decision process regarding to buy or not to buy:

rule 1: I want to buy in a rising market, not a falling one. (different from purchasing securities though)

rule 2: I believe that the RE market trend is directly set by supply and demand. That's the foremost factor.

So, I would be watching anything that affects either supply or demand. For example, foreclosure rate, tighter loan requirements, buyer's purchasing power, and other second-order factors (general economy, unemployment rate, etc.)

Now, will the drop in the fed rate (or the actual mortgage rate) change the market trend? A lower mortgage rate means that people can pay for more expensive houses, which allows sellers to ask for higher prices, thus creating an upward market trend. But, do I think this upward market trend would defy the current huge downward pressure? Absolutely not. The rate drop does very little to increase the demand (it simply allows people to buy a slightly more expensive house with the same monthly payment), or to reduce supply, compared with other factors that are setting the trend now.

Actually, I don't think any single event can break the market's fall. The effect of the rate drop on RE market would be similar to the effect of a rubber band trying to stop a train.

Cmyst said...

My guess is that most of the people who could afford to buy at the inflated prices -- or were foolish enough, or lied enough -- have done so. Those of us left are people who have more clarity of thought.

I make a good California middle-class income of 100K. I'm over halfway to retirement, though, and I am not willing to work much past 65, even though my job isn't that strenuous and I enjoy it. I figure I can afford half the house I would have been able to when I was 35.
I'm not trying to time the bottom of the market. The homes that interest me most are in neighborhoods where the median household income is between 78k and 97k. Therefore, I don't think I'm setting my sites too high, and while I wouldn't want to risk insulting any sellers with offers in the 275K range right now when they're asking more in the 375K range, I don't consider the 275K a "lowball" price -- I consider it sane, and possibly even more than reasonable considering most of the homes I'm looking at were valued at 150K to 200K in 2001, and normal appreciation of 3 to 4% a year has their "value" even less than what I'd be willing to pay.

Patrick Hake said...

Great points Wont and Cmyst,

You both seem to have a rational outlook on the market.

I believe the Fed Funds rate will have only a marginal effect on short term demand for housing.

If it has an effect, it will come from improving overall consumer spending, which may create an increase in income, which will then create higher affordability.

Now, if mortgage rates decrease appreciably, I think it will have a larger effect. It will help stem the tide of foreclosures due to resets and it will increase buyer purchasing power.

The fact is that the cut in rates yesterday has caused only a minor drop in 30 year mortgage rates. The lender I work with, Brent Wilson of Comstock Mortage, e-mailed me this afternoon and said rates had only dropped .125% from the Fed cut.

Just as supply and demand determines the price of homes, it also determines mortgage rates.

Diggin Deeper said...

Hey Patrick....better watch those T-Bills. For two days now they've gone in the wrong direction...maybe it will turn around...maybe it won't