Sunday, October 21, 2007

Builders 'Getting Body-Slammed Right Now'

From the Sacramento Business Journal:

First things first: Sacramento's economy won't rebound to greatness next year. It should grow a little, economic forecasters say, but it will take until 2009 for the housing market to revive and fuel other sectors such as retail and construction. In the meantime, they say, there's no reason to panic.
...
"The main thing that will determine how fast Sacramento recovers is how fast the housing sales recover," said Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto. "I don't see any reason that the volume of housing activity needs to go down any further. It's already well below the equilibrium levels for long-term demand," he said. But while sales volume might have bottomed out, prices most likely haven't.
...
Sacramento was hit particularly hard this year, with the median price of a resale home falling 15.7 percent in the two years from its August 2005 peak to August 2007. That's the second-biggest drop of 15 regions across the state, and it was driven in part by rapid new-home construction that caused a supply glut when demand softened, the association said.

Sacramento had a steeper fall because it had a steeper climb. Even though the market remained cheaper than the Bay Area, the gap got too narrow, said Levy, and Sacramento doesn't pay the wages needed to sustain the prices Sacramento houses were fetching. His forecast calls for prices bottoming out in 2008, which should make sales volume pick up by the end of that year.
...
A lot depends on the public's perceptions next year. "The only danger to the overall economy is if consumers get spooked by what they see in housing prices and start cutting back on consumption," said Levy. "If people agree with me that the volume activity levels are about at the bottom, we've taken that hit."
~~~
Scott Anderson [vice president and senior economist, Wells Fargo]: The housing market declines have been a little more severe than we expected, given generally neutral mortgage rates. All this has been driven by overvalued housing and tighter lending restrictions. It's a significant adjustment for no real increase in mortgage rates.
...
People think of Sacramento as being a fairly affordable place to live, at least by California standards. I'm not sure that's anymore the case. From a national viewpoint, it's no longer a low-cost place of doing business.

Stephen Levy: The Sacramento region needs to provide for housing that's affordable to a broad range of people. That's an economic issue, not just a housing issue. The threat to the Sacramento economy right now is in unaffordable housing.
From the Sacramento Business Journal:
The Sacramento region remained mired in ninth place -- unchanged from a year ago -- in a comparison with its chief economic competitors in the West. The six-county region ranked low in a matchup with 10 communities plus the United States as a whole, according to the latest Prosperity Index report released today by the Sacramento Regional Research Institute..."In fact, the region received the lowest score among competitive regions in both the job growth and unemployment rate indicators," the report said.
From the Sacramento Bee:
The [Sacramento] region added 1,700 jobs in September, following two straight months of job losses. The region's unemployment rate was 5.4 percent, the same as the month before. But it was well above the 4.3 percent of a year ago because of job losses in construction and other housing-related industries. The region's construction and finance sectors lost 1,300 jobs in September.
...
[A]nalysts agree that retailing is a key industry to watch for signs of where the economy is heading. California retailers did minimal hiring in September; there were no net gains in retail jobs in Sacramento. September is usually a month when retailers expand their payrolls, to handle back-to-school sales and get a jump on the December holidays. "Retail is kind of flat," Lyons said. "Retailers are holding back."
From the Sacramento Bee:
Growing consumer debt, the subprime credit crunch and the housing market's steep slowdown have spurred real concerns that shoppers may curtail holiday spending this year. The housing slowdown and credit worries have whittled away at local retail leasing, a pillar of commercial real estate during the housing boom. According to broker CB Richard Ellis, retail vacancies jumped to 7.1 percent for the third quarter, up from 5.9 percent a year ago.
From the Sacramento Business Journal:
Bank deposits grew in the Sacramento area less than 1 percent in the past year, a far cry from the double-digit growth in deposits common earlier this decade...For the first five years of this decade, the region's fast deposit growth prompted banks from all over the country to open offices here. Now that the branches are here, the deposit growth is slowing overall.
...
The decline in growth could mean people have less money, that they are saving less or that they are shifting money from insured accounts to other investments such as stocks, bonds, real estate, or Treasury bills or municipal bonds. It could also point to more money going into credit union accounts.
From the Stockton Record:
Months have passed since the days when dozens of homes at a time were going up in any given subdivision in San Joaquin County. But these days, the typical new-home development looks as if it's nearly in hibernation as the housing market steps into the third straight year of decline.
...
Greg Paquin, president of the Gregory Group, said builders have responded to a very slow market not only by cutting prices further but also by either delaying or stopping projects or in a few cases by selling standing homes at auction. "They're getting body-slammed right now, frankly," he said.
...
"Valley new-home construction sites are ghost towns," said Shane Hart, vice president in charge of acquisitions, development planning and marketing for Stockton-based Grupe Co...Grupe has offered as much as $150,000 in incentives per home, yet sales have become so slow that construction was halted at three developments in Stockton, Waterford and Tulare.
...
Paquin said there's more bad news on the horizon for new-home builders, who in recent months offered such low prices and incentives that they even drew buyers from the existing-home market. The flood of foreclosures is attracting the attention of bargain hunters and forcing existing-home prices down so much that those homes are getting more attention from potential buyers, he said.
From the Sun Post:
Complaints from two developers that rising foreclosures and a large housing inventory have crippled sales led the [Manteca] City Council this week to postpone the fees developers owe for homebuilding reservations under the city’s growth cap. The council’s 3-2 vote to postpone millions of dollars in fee payments for two years was opposed by councilmen Jack Snyder and Steve DeBrum, who worried that it could damage the city’s budget.
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Stockton attorney Mike Hakeem — lobbying on behalf of developers Raymus Homes and FCB Homes — countered that no one else would be willing to pay for the reservations this year because the housing market was so bad.
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During their discussion, councilmen both for and against the extension focused on the need to keep home prices up. “These are significant factors when it comes to how we need to proceed as a local city government to protect the values of our homes,” said councilman Vince Hernandez, after alluding to an auction of 34 new homes at highly discounted prices last weekend.
From the Modesto Bee:
Unemployment rates in Stanislaus, San Joaquin and Merced counties swelled above last year's averages, the result of a shaky economy and deepening housing crisis. The three counties each gained at least a percentage point from the previous year, with Stanislaus County recording the biggest jump. The county went from an unemployment rate of 6.6 percent in September 2006 to 8 percent last month, according to state Employment Development figures released Friday.
...
The housing slowdown has taken an even larger toll on San Joaquin County. Its unemployment rate was 7.8 percent last month, up from 6.5 percent the previous year. The county saw huge declines in manufacturing, construction, professional business services and financial activities. Combined, those industries lost about 2,100 jobs. "All are definitely related to the housing crisis and mortgage credit issues," Baker said.

19 comments:

Jeremiah said...

"The only danger to the overall economy is if consumers get spooked by what they see in their checking accounts and start cutting back on consumption," said Levy.

There, fixed that for him.

bubblemachine said...

During their discussion, councilmen...focused on the need to keep home prices up...alluding to an auction of 34 new homes at highly discounted prices last weekend.

What a bunch of morons. I've got news for these local political hacks. It's called the Law of Supply and Demand. Prices will keep going down until we reach market equilibrium, and that won't happen anytime soon.

Sippn said...

Yes and what the political hacks are trying to do is reduce the supply. That will move the market equilibrium point back in the direction it came from. Not a bad move.

Every time you see a new home subdivision "mothballed" or a builder failure, that represents a reduction in future supply. "Body-slammed" is right.

Step two in the "12 step" process.

(OK I am googling the steps and I don't see it.)

If you think this ride is forever downward, rent.

I think sales volume is recovering to pre-credit crunch (August crisis) numbers - starting to see indicators (pendings). The bad sales numbers you're hearing now are August and September contracts.

Builders likely have reached bottom for pricing, but you'll see the average price continue to drop as they will stop building larger homes - their mix will be smaller/cheaper. Cost is already creating the price bottom by limiting supply and failing builders.

Speaking of cost, have you seen copper, steel, fuel? They didn't notice the housing problem.

On the resale market, sure there will continue to be REOs, but I'm not sure those numbers are as large as the new builders reductions in starts - so overall supply should not grow.

I looked at some other markets using your link and many saw 20% inventory increases in 2007 v 2006 - not Sacramento which actually declined from the 2006 peak inventory vs 2007.

Diggin Deeper said...

Builders are dictating home prices across the valley. $100-150K price drops are happening and taking new found "wealth" to task. Making money and gathering wealth just wasn't that easy as most are beginning to find out.

Agree inflation (copper, concrete, steel, etc.) will drive the home sizes down. It will also take their profit margins to more market driven levels. But, for now it's survival or failure for the builders. It's better to take a big hit today than get crushed by waiting. When will the banks get that message?

Seems that the hyper runup is setting up for the same reaction on the downswing which is fairly common in a bubble scenario.

Gwynster said...

2 more REOs in Davis, decent SFRs too and not condos. The other SFR REOs haven't sold yet. One was listed as a sale in the Aug SacBee numbers so there is another blow to the SacBee's credibility.

None of these are the people I know that are in the process of handing the keys back now.

Hey AB, if you are out there, can you find the story on 617 D street? This guy is crazy underwater and a sold sign popped up and dissappeared in days. Never saw it hit the MLS.

And of course our favorite el macero condos are currently chasing the market down with price reductions.

It's a good Monday morning >; )

Perfect Storm said...

Bank deposits grew in the Sacramento area less than 1 percent in the past year, a far cry from the double-digit growth in deposits common earlier this decade.

Things are just going to get real slow around here for awhile I reckon. Less savings means less down payments, which means less sales.

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

smf said...

"Builders likely have reached bottom for pricing"

Doubt it. Plus, there are still new homes that will come to the market thru this cycle. Remember, if a builder doesn't build, they go out of business.

"their mix will be smaller/ cheaper."

Till buyers realize that they can get a bigger home on a bigger yard by going resale instead of new. NOBODY is making certain that home users are really getting what they want.

"Cost is already creating the price bottom by limiting supply and failing builders."

A housing excess does not get fixed quickly. Last week they had a story where a housing glut in Florida took SIX years to work thru. And this excess was far worse.

"Speaking of cost, have you seen copper, steel, fuel? They didn't notice the housing problem."

Give it a little time. This period was known for a WORLDWIDE excess of speculation.

"I looked at some other markets using your link and many saw 20% inventory increases in 2007 v 2006 - not Sacramento which actually declined from the 2006 peak inventory vs 2007."

There are still plenty of people out there waiting for the market to come back. Including those who have bought REOs hoping to flip them next year.

Diggin Deeper said...

"Speaking of cost, have you seen copper, steel, fuel? They didn't notice the housing problem."

I really don't believe that material costs will affect the pricing picture in the short run. If anything, as stated by smf, a buyer gets more for less by buying existing. However, if energy (and higher commodity base costs) are creating a paradigm shift toward smaller and more efficient living, it could eventually play into the builder's hand by going smaller.

The kings and queens are the one's holding ready cash to jump on this market when it settles to the bottom.

smf said...

DD

Some builders neglect to do due diligence in trying to figure out what their customers want, in others, they don't do simple market research.

I first heard about problems about condos from a builder in 2005. Why did others not follow?

Logic would also dictate that if big houses weren't as prevalent before, they would not be now. But many builders did large McHomes, when the market for them was not really there.

When my parents bought an actual 'mansion' in 1996, a large home was considered 3000 sq. ft. Now they are a dime a dozen, and hold nothing special in their guts.

And now they are assuming that people are willing to be crammed into little houses in little land. That would also be wrong. Because most of all like a decent home in a decent sized yard.

Patient Renter said...

"During their discussion, councilmen...focused on the need to keep home prices up"

Since when is it within the charter of a city council to devise ways to float asset prices? WTF is this?

AgentBubble said...

Gwynster said...

Hey AB, if you are out there, can you find the story on 617 D street? This guy is crazy underwater and a sold sign popped up and dissappeared in days. Never saw it hit the MLS.


This is a wild one...

Property history:

12/21/05 - Sold to RE agent for $875,000. $845,000 financed.

5/13/06 - Listed for $925,000

8/1/06 - Relisted for $875,000

8/22/06 - Relisted for $939,000

10/27/06 - Relisted for $849,000

1/17/07 - Relisted for $875,000

9/8/07 - Relisted for $875,000

10/12/07 - Sold for $875,000.

Assume a mortgage of $6,000 per month. Agent owned property for just under 2 years and would have made about 21 mortgage payments.

21 x $6,000 = $126,000 paid
Ending balance on mortgage would have been around $826,000.

Add in loan/escrow fees for purhcase transaction of about $12,000, then fees to sell house of about $20,000, and we get $32,000 in fees. Add in the $30K he put down too. He's into the house for $62,000 (fees, down payment) and $126,000 (mortgage payments) for a total of $188,000.

Sold it for $875,000 (same price he paid for it in 12/05). Lived in it 21 months for a cost of $188,000. $8952/month. Not bad.

Diggin Deeper said...

Wow...Aren't there drugs for the manically depressed? Could have just taken prozac in 12/05 and saved a lot of trouble trying to decide how much money to lose from there.

watchingthebubble said...

I'm no economist or real estate expert, but something in this spate of news makes me want to cry out, "IT'S THE SALARIES, STUPID!"

I don't care how much builders cut their prices or whether demented city councilpersons try to prop up the prices of overpriced homes (talk about needing pricing Viagra!), at the end of the day, you can't squeeze blood from a stone. If people don't earn the money to buy these overpriced turds, they ain't gonna, period. They can't, unless some financial genius comes up with the 120-year mortgage.

Some of us lesser skilled folk use what I call the "craigslist indicia of affordability." I type in the maximum amount I'm willing to pay for a house on the homes for sale page for Sacramento and see how many homes show up. Then I type in the same amount for another city I like. Right now, there are a ton of nicer cities that are way more affordable than Sacto. If this market doesn't straighten out by next summer, DH and I will probably be moving on. I don't have a lifetime for FBs to figure out that their stucco litterboxes aren't really worth $400,000, at least not to me.

Gwynster said...

LOL now there are two properties on that lot. The second is a converted detached garage into a 1 br rental. The house 2 doors down had the same set up (2/1 main 1/1 detached) which sold for 675k for 14k below listing in july or Aug. Something smells funny.

I've seen the guy getting in and out of the car, the greyhair had RE snakeoil all over him.

There is now a 2/2 a few blocks away that's REO. If the owners of 617 D are legit, they are sure to be kicking themselves.

Diggin Deeper said...

"I've seen the guy getting in and out of the car, the greyhair had RE snakeoil all over him."

Did he step over the cracks, wash his hands repeatedly, and have a long heated conversation with himself? Hey I think I know that guy...he's a mortagage broker...

Diggin Deeper said...

Looks like SoCal from San Diego to Santa Barbara is in a fire storm. Many structures going up in flames, $Billions in damage as 11 major fires run uncontained. Not a way I'd figure to prop up the construction industry as this one could be really be devastating if those winds don't die down...

norcaljeff said...

Sounds like that guy in Davis was throwing darts at the wall every two weeks picking the next price for his home.

Gwynster said...

I can't believe it sold considering that REO is another 2/2 with a detached rental unit.

Lots of people wanting to get rid of their MFRs. This is a nice indicator of where rents are expected to go. 90-94 was brutal in davis for rental markets according to locals.

SheWrestles said...

"During their discussion, councilmen...focused on the need to keep home prices up"

Since when is it within the charter of a city council to devise ways to float asset prices? WTF is this?


It makes sense to keep your constituents happy.

The builders are still going crazy with new construction in Lincoln Crossing - don't ask me why. But, I stopped in the other day and unless the saleswoman was being deliberately misleading, a lot of the home sites were marked 'sold' on the board.

It's certainly within the realm of possibility that they would use that tactic.

I have no problem with a city council saying "no new developments" until 2012.