Monday, October 15, 2007

"Artificially Cold" Real Estate Market

From the Sacramento Business Journal:

The area's first developer-driven auction of new homes attracted a lot of attention and bids -- but none high enough to close a deal. Twenty bidders left the auction late last month thinking they'd landed a steep discount from the asking price for a piece of an award-winning housing development near the river in West Sacramento.

But the deals never closed escrow. Two weeks after the auction, the bank that holds title to the homes canceled the sales, citing auction rules that the bids didn't meet minimum prices. Other than sore feelings from some of the bidders, it's as if the auction never happened.
...
Even though the auction saw some lively bidding, the homes failed to get anywhere near the reserve prices, let alone the list prices. For River's Side, the final bids were an average of $88,000 less than the reserve prices, [John] Leonard said...Leonard said a confidentiality agreement with the lender prevents him from discussing details, but that the bank didn't think the auction environment correctly tested the value of the homes.
From the Redding Record Searchlight:
Here's another sign of a stagnant real estate market: Some developers in town are taking their homes off the market and turning them into rentals. Two weeks ago, East Oak Estates in south Redding announced this would be the last weekend some of its homes would be for sale. They were going to start leasing them out.

But East Oak developer Karen Margrave said buyers waiting for some colossal closeout sale will be sorely disappointed. She has no plans to sell her homes at below what she paid -- nor she says will other builders. So they're getting into the rental business while waiting it out..."We know prices are going to go back up, and we believe they will start rising again next spring," Margrave said in an e-mail.
...
Brad Garbutt, who's been selling real estate in Shasta County for years, said it's unusual for developers to rent back their homes. "I don't recall any developer on a large scale doing something like that," Garbutt of Real Estate Professionals GMAC said. "Developers usually can't do that. They can't stop everything because the bills keep coming." Glen Jones of Greater Shasta Homeplaces in Redding agreed that it's strange to see a builder get into the rental business. "I have never seen it before, but we have never had this situation," Jones said.
From the Tri-Valley Herald:
In light of the lethargic housing market, local home builders are asking city leaders to alter the structure of existing development agreements to give developers more time to build. During Mondays Manteca City Council meeting, developers of some of the newer subdivisions plan to ask for an across-the-board extension in the amount of time they have to build homes once theyve obtained building permits. If approved the deadline would be extended from three to five years. The builders believe that an extension would offset some of the problems caused by an overabundance of houses and a downturn in the housing market
...
The proposed increase was spread out over the period of time real estate experts predict the market will reach bottom and turn around. The market was artificially hot a couple years ago and is artificially cold now. People are worried, but the market is resilient, [George] Gibson [of Stockton-based FCB Homes] said.
From the Modesto Bee:
[Sarah] Huff and her husband, John, say their contractor, Viking Pools Mid-Valley Inc., has closed its doors without finishing their pool, and she doubts she'll ever get her money back or a finished pool out of the defunct business.
...
[Viking western regional sales manager Aaron] Stahl and other pool industry officials said the housing market bust has hurt many pool contractors, which prospered when it was easier to buy a home or refinance a home loan. As a result, some business owners may be more likely to cut corners to stay afloat, industry officials and consumer experts said.

That may have been the case with Mid-Valley. [Tina] Hill, who worked there for 2 years, said orders slowed dramatically over the past year, mirroring the free fall in home prices and sales. "I'm sure it's a direct result of that," she said. "There were a lot of problems, off and on, and the last three months there were just more of them." Don Burns, president and chief executive officer of the California Spa and Pool Industry Education Council, said many pool contractors are struggling because of the housing slump.
From the Stockton Record:
Countrywide Financial Corp., sharply paring its work force nationally in the midst of an on-going housing slump, has closed its Stockton loan-processing center. A company phone message and a notice posted on the front office door said the March Lane center has closed and has been consolidated with a Countrywide center in Elk Grove.
...
One Stockton resident, Susan Feighery, has been trying to get a Countrywide mortgage loan for a condo purchase, but she said she is frustrated because her loan application has been delayed as it has seemingly bounced from one person to another as staffing dwindled...[S]he was told several times that her loan application was being passed to someone else and that the previous handler no longer worked for Countrywide.
From the Sacramento Bee:
Speaking of office vacancies, the Sacramento region is holding its own for now. But look out for next quarter. "There are not enough tenants to go around," says [local Cornish & Carey exec John] Frisch, who reports that the region's vacancy rate is 15.22 percent, up a hair from the previous quarter.

The cause for concern: Nearly 3 million square feet of new office space is under construction in the multicounty region. But there's not nearly enough business growth to absorb it. "I expected a lot more red ink at the bottom of the (space absorption) tables," Frisch says of his company's third-quarter vacancy report. "I think there will be next quarter."

21 comments:

Gwynster said...

"the bank didn't think the auction environment correctly tested the value of the homes."

Bawhahahaha!

It tested it fine. The bank just didn't like the "results environment".

This is great comedy for a Monday.
Did anyone catch the Bee doing the piece on the 350K oak park lofts and then the next day they can a piece on Oak Park vacant lots filled with debris and animal carcasses?

Lander said...

August 2007, Letter to the Editor

"Every day we open the paper, there's more doom and gloom about the construction and real estate market. Apparently you are of the belief that everyone wants to read that every single day. It's not new. Maybe the Record Searchlight should fire all its reporters and just go to online news and do a streaming feed from RealtyTrac, thus saving the time of transferring to print. In all seriousness, why doesn't the Record Searchlight make some effort to report independent facts? What would it hurt, rather than looking at the downside, you highlighted the positive aspects of the current market?"

"For instance, after years of having a seller's market with uncontrolled appreciation, the tables have turned. It's a great time to buy property. Interest rates are still at some of the lowest in history. Builders are offering upgrades that used to cost buyers thousands of dollars, and incentives to help with financing. Additionally, the economy is good, and real estate is one of the only assets that cannot be reproduced. If someone buys the property you wanted because you waited too long, it's your loss."

"Nobody is asking the Record Searchlight to lie, but to quit being so negative. Maybe if every person involved in any way or that benefits from the construction trades -- contractors, suppliers, realtors, people working in the stores, restaurants, etc. -- quit buying the Record Searchlight, you would understand that there are two sides to every story. And you don't always have to choose the most damaging side to your readers to report."

Karen Margrave
Redding

Bob said...

"We know prices are going to go back up, and we believe they will start rising again next spring,"

Thanks for the laugh. I actually laughed out loud at that one. Enjoy the rental business Karen. you're going to be in it for a while.

Gwynster said...

That letter to the editor was hysterical. Somebody needs to call the Whaaaambulance for Karen.

smf said...

Gosh, Gwyn, it's like they are forgetting about that HUGE overhang of unoccupied houses around the nation, right?

Did you catch that little blurb on HBB? Where the last time Miami had a condo glut it took SIX years to clear?

And this time, the glut is much worse. And it is expected to clear in 15% of the time? Sorry, won't happen.

Diggin Deeper said...

Talk about collateral damage! What a way to drive rental rates down...flood the market with new homes and condos for rent against a backdrop of vacancies that aren't be filled to begin with. It's become a game of chance...a hope against all odds that your property will rent and for a decent rental rate.

Those of us on this blog for any length of time have correctly predicted the fallout that's happening right now. Peripheral businesses are facing a huge drop in demand and are having to react by laying off workers or closing their doors altogether.

Phony auctions are not producing buyers that are willing to pay anywhere near what the banks and builders want for their homes. It's a standoff the buyer will eventually win. They have time on their side, whereas the banks and builders cling to a prayer that the market will turn in their favor, soon.

This is not a recipe for a healthy economy in Sacramento and when jobs are being eliminated to account for reduced demand, the real estate prices will make their next move down.

Gwynster said...

SMF,

It's a wacky world out there. That 20k in vacancies in Sac Co. is still 20K in vacanies whether they are for sale or rentals.

I know a few new landlords are banking on rising rental rates to even up the disparity between lease costs and PITI. That will just exacerbate the vacancy problem we already have.

Rents are really determined more so by the free market then the cost of homeownership.

Renters are the frogs that feel the heat the fastest and are first to hop out of the pot. Once rents go beyond an average tenants ability to pay, you get people doubling and tripling up in a property or they relocate out of the area. Either way, you just increased the vacacancy rate.

It's not like this is rocket science. Are people really unable to connect the dots?

andnee said...

Its almost like the people who predict the end of the world on DAY X, and then DAY X comes and goes and no one says, "whoops we were wrong there". The same goes for these, sorry, "wishful morons" saying that we know the prices are going to appreciate in the spring.

HEY IDIOTS the reason no one is buying is the prices are TOO DARN HIGH!! And you expect them to go up? Get ready for an ATRIFICIALLY COLD spring.

Cow_tipping said...

Construction loans taken by builders usually have 8-9% rates (its only for a short period before they sell remember). If the house doesn't appraise higher than the loan amount, they cannot roll into a permanent, unless they ponied up the difference. Ergo - the geniuses that couldn't sell the houses for the $$$ the bank was due are going to pay 8-9% interest and rent them for 1500. Booya for a 5K a month haircut. No wonder you dolts are in construction. How long you believe this can be kept up. 5-10 years ?? Every time I open my front door and the roof doesn't come caving in is a thank you to god with geniuses like you building houses as fast as the mexicans come running across the border.
Cool.
Cow_tipping.

smf said...

"Are people really unable to connect the dots?"

Yes.

The data has been lacking, or simply everyone played dumb.

It has not been till a few weeks ago that the issue of inventory has come up.

The problem is so large, and this bubble so worldwide and large in scope, that most cannot grasp what happened.

After all, as they say, 'generals fight the last war.'

anon1137 said...

Maybe this will be like when the Japanese real estate bubble collapsed and the banks and government and everyone who had a stake pretended it didn't happen for like 10 years. They kept bad loans on their books, kept making new bad loans based on old valuations, and just waited for inflation to bail them out. Hey, as long as there are few sales, no one knows the diff, everything's cool in fairyland.

norcaljeff said...

RE: Auctions = Scams, period. These banks/builders aren't serious about selling, and its obvious with their tactics and ridiculous prices. I don't bother to show up to these because they are clueless about how bad this market it. No one wants your overpriced homes! Get over yourselves, this is not 2004.

Rob Dawg said...

eBay's fault. Look, an auction with a reserve is not an auction. An auction with a hidden reserve is nothing more than participating in uncompensated marketing research.

I don't even know who to blame. My first take is to blame the auctioneer. "SOLD! (provided all the terms are acceptable to the seller) doesn't cut it.

PeonInChief said...

In order for rents to cover PITI, they'd have to rise much more than most tenants here could afford to pay. It's likely that the professional management companies are trying to boost rents to keep the owner-investors from foreclosure and while it could boost rents a bit, it's not going to be enough to cover most of those mortgages. This is particularly true when house prices are falling.

Also vacancy rate has little effect on rent levels. (I know that's counterintuitive, but John Gilderbloom has been studying this for years and this is his conclusion.) Three factors determine rent levels in a community: the median income of the community (what the market will bear), the cost of the alternative (house prices) and the extent to which professional management firms control the rental housing market (price-fixing).

But the problem is that no one can afford to buy at the prices owners (or their mortgage-holders) want. It's not likely that anyone will be found to rent for those prices.

robert said...

You know....My credit union (Golden 1) holds a workshop regularly called "Tips on Buying a Home".

Wouldn't it be great to attend and see what kind of nonsense they spout?

Maybe the insturctor would be a Realtor or Mtg. Broker. You could have fun with them.....feeding the crowd tidbits of reality from this blog and maybe Ben's housing bubble blog.

Ahhh...the possibilities!

G Spot1 said...

These cities and counties who approved development agreements left and right without limits haved screwed themselves and especially people who bought in these new neighborhoods. In 4-5 years when the demand for housing is still out of whack with supply, the builders will be asking for further extensions, if they are even still in business. People who bought in these half finished subdivisions are going to have to get used to it.

On the bright side, at least their kids have empty lots with abandoned construction equipment to play in...

bubblemachine said...

It's a great time to buy property.

Mental illness is a terrible thing.

Nobody is asking the Record Searchlight to lie, but to quit being so negative.

Newspapers don't have to lie. The RE agents will do it for them.

wimpyVO2max said...

This made my jaw drop:

According to a CNBC survey "an overwhelming 90% of American home owners expect their home prices to stay the same or increase over the next 12 months by an average of 3.9%"

http://www.cnbc.com/id/21271391/

Cow_tipping said...

Oh, just 88,000 under their cost. I call that market artificially warm. You want reality (as opposed to realty) I'd venture to guess it at 100 a sqft for a 1 story and $75 a sqft for 2 story.
Cool.
Cow_tipping.

Jacob said...

I'd buy at those prices. :)

Not sure why that would pass on all homes just cause they are $88k below the min that they wanted. $88k is a small amount for a bank with millions of dollars of depreciating assets.

So now they just keep the houses, spend more money on carrying costs, staging, whatever.

I'm surprised that there were any bids at all. Prices are so out of whack, with news of falling prices and tightening of credit, I doubt that there are 20k buyers out there at all.

norcaljeff said...

RE: According to a CNBC survey "an overwhelming 90% of American home owners expect their home prices to stay the same or increase over the next 12 months by an average of 3.9%"

I always thought 90% of Americans were mentally challenged.

P.S. Did Sippin hurt himself?