"Conditions Will Get Worse Before They Get Better"
From the Sacramento Business Journal:
Pacific West Cos., of Reno, Nev., was on a roll in recent years, selling out condominium communities in the Sacramento region. Then came 2007, and a troubled housing market. The company's Montessa Attached Homes in Rocklin fizzled. The project, slated for 171 condos, has pre-sold just seven since the spring. The development company started returning deposits to those buyers last week. "We are clearing out our inventory of buyers. We don't want to string them on forever," said Taylor Cohee, head of sales for Pacific West.From the Modesto Bee:
...
The Rocklin condo market has been hit hard by overbuilding in the past couple of years. Some of the big national builders dramatically cut prices on units there. D.R. Horton Inc. and Ryland Homes, a subsidiary of The Ryland Group Inc., sold some condos for $100,000 less than planned.
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At a time when about one-quarter of homes sold in Sacramento are foreclosure properties, [Bruce] Slaton [founder & owner of SacramentoCondos.com] predicts conditions will get worse before they get better..."I think the foreclosure numbers are going to increase a lot between November and May because the largest pool of adjustable rate mortgages start indexing -- stepping up -- then. That will probably result in twice as large an inventory of bank-owned properties as we have right now. Right now, we have a bad housing market and a good economy. If we have a bad economy next year, that's going to open a new chapter."
~~~
Economy-watchers like to point to Sacramento's job numbers as a sign that the housing downturn isn't too devastating. What the region has lost in construction jobs it has picked up in government and services. The total job figure is as high as ever, and the economy remains strong.
That's great news for a construction worker with the skills to get a government or service job. Otherwise, the numbers from the state Employment Development Department are bleak. As of September, 69,100 people had construction jobs, down from 73,600 a year earlier and from 76,600 in September 2005 -- which also happens to be the peak for the industry. That's almost a 10 percent drop in the course of two years.
...
"Commercial hasn't slowed down very much. We know that it will if the housing side slows down long enough," [president and chief executive officer of the North State Building Industry Association John] Orr said. And with more players concentrating on commercial, that means more competition for the firms already specializing in it.
...
"Everyone's workload is still healthy," [Larry Booth, president of Frank M. Booth, a mechanical engineer and contractor]...said. "But the residential component of construction is still the biggest piece of the pie. To assume that the big part of the market slowing down is not going to affect the commercial industrial side -- I think it is going to affect us at some point."
~~~
Leo Koo used to have four salesmen on the floor at his Lifestyle Furniture Gallery on Arden Way. Now he has two. Sales have fallen by half in the past year, and Koo blames the downturn in the housing market. With fewer people buying houses, there is less demand for new furniture.
~~~
Dwindling margins and the hard-hit housing industry cut into third-quarter profits for local banks as more troubled real estate loans surfaced in the Sacramento region...[B]ankers are closely watching the once-booming housing market that has been a bust during the past several months.
Previously red-hot markets such as Sacramento, Merced and Fresno saw falling home prices and have farther to fall as the market slows, said David Harvey, managing partner of Hot Creek Capital LLC, a bank hedge fund in Reno, Nev. "Some of these markets are of a national concern to financial companies," he said. "The entire east side of the Sacramento Valley, where there was such a big rise in single-family housing development, is now stagnant."
Looming budget cuts mean Modesto residents are about to see fewer services for their tax dollars. Reductions in the number of police officers, firefighters and park services are on the table this week as the City Council begins looking for more than $14 million to protect a reserve in Modesto's $135 million general fund...City Manager George Britton put a hiring freeze in place three months ago and asked Modesto executives to find ways to cut their budgets by 7 percent.From the Stockton Record:
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Modesto's budget recovered in 2005 and 2006 because the city benefited from a housing boom that raised its property taxes, construction-related revenue and retail spending that contributed to greater sales tax receipts...But the outlook started to worsen in March and April when revenues began to decline. Since then, Finance Director Wayne Padilla has refined the city's budget picture to reflect continuing shortfalls. Last month, a sales tax consultant advised the city to trim its revenue projections by $1.2 million. This month, Padilla cut another $1 million in expected revenue linked to property transfers.
A committee examining ways Manteca can create more housing that is affordable and attractive to police officers, teachers and other similar professionals wants city leaders to tap into the failing housing market that has left foreclosed homes dotting the city. The committee, formed in February when city officials saw a need for homes the middle class could afford, recommended recently that city staff examine ways Manteca could buy and reuse foreclosed or repossessed homes.
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[I]nstead of building new housing, the city could purchase existing homes that are going for below their market value and resell them using a 99-year land lease, meaning the city would own the land and only sell the house on it, cutting down the buyer's total cost,"...[committee head Ben Cantu] said.
Turning foreclosed houses into affordable residences is not something many cities have done, according to Max Neiman, the associate director of research at the San Francisco-based Public Policy Institute of California. "It strikes me as very innovative to have cities looking at the foreclosure issue as an opportunity to deal with other problems," Neiman said.
49 comments:
Oh yea, 99 year land lease and sell just the house on it so cost is low. Yes that is a dumb idea.
Why ... one, you buy foreclosures now, those will start going up in $$$. You need to wait till it floods the market. Then since most of the value is in the land, you need to be prepared to sell it for 150K or so less cos you still own it. And even so, if market drops more, you'd be stuck with it. No one will want to pay you rent on anyhting. You sell it and its gone, 99 year rental is still a rental.
Just wait till it really drops. Then they can buy it themselves, city can just sit back and say, Oh, here is affordable housing.
Cool.
Cow_tipping.
Previously red-hot markets such as Sacramento, Merced and Fresno saw falling home prices and have farther to fall as the market slows, said David Harvey, managing partner of Hot Creek Capital LLC, a bank hedge fund in Reno, Nev. "Some of these markets are of a national concern to financial companies," he said.
You got that right, were right on track for a 50% decline by 2009.
"What the region has lost in construction jobs it has picked up in government and services. The total job figure is as high as ever, and the economy remains strong"
Not if you read the Governators plan to reduce spending...Loss of civil revenues means fewer future burgers being flipped at McD's. Growth in the service area was directly related to a projected growth that NEVER HAPPENED. And government job growth was no different. State, county, and local governments saw revenues booming, hired accordingly, and are now finding out those revenues were basically smoke and mirrors. Face it. Sacramento is a "one trick pony" economically. It needs the growth of state government to propell it's economic engine. Or looked at differently....What would happen to the city of Sacramento if state government, and related services, pulled up and moved to Fresno? I dare say we'd probably end up a modern day ghost town.
LA, OC, SD, and the Bay area are economically diversified enough to weather an economic downturn and return to growth at some point. Imho, Sacramento is not, and cannot grow, until most all other areas in the state are moving forward.
Plus, it is misleading to look only at total jobs. It is more illuminating to look at what kind of jobs. Replacing relatively highly-paid working class jobs in construction with low-paying service sector jobs will not save the economy, and service workers should NEVER have been able to obtain loans for 400K homes. When people buy homes that they can afford, we all profit. Working class neighborhoods improve because people own there and they have a stake in their area.
There isn't a large enough pool of foreign professionals to buy the excess housing inventory, service jobs do not pay enough to qualify for home loans, and only local boomers are buying retirement homes in Cali. (Actually, many Cali boomers are trying to sell out and move to lower cost of living areas. I know two that moved to the Midwest this past year.)
Is anyone else hearing about people that are current on their mortgages walking away because houses in their area have depreciated such that it no longer makes financial sense to make payments on a house that will take 10 or more years to return to current "value"???
We constantly hear about subprime and what effect it will have on the housing market. How much of an impact will this have?
This morning was the second time I've heard this in the last few weeks and I believe this will be a growing trend...especially if we see further declines of 25 - 35%.
ralph...that just seems foreign to me. If you're current and don't have to move, why destroy you're credit by walking away?
Plus, it is misleading to look only at total jobs. It is more illuminating to look at what kind of jobs. Replacing relatively highly-paid working class jobs in construction with low-paying service sector jobs will not save the economy, and service workers should NEVER have been able to obtain loans for 400K homes. When people buy homes that they can afford, we all profit. Working class neighborhoods improve because people own there and they have a stake in their area.
Here, here! I wish there was a way to post an applause smiley.
I moved up here from the L.A. area for the schools and the affordable housing.
I know I say it every day, but it still blows my mind that homes are selling at the prices they are here in TB.
Maybe there are a lot of people doing much better than is perceived. I don't know.
ralph...that just seems foreign to me. If you're current and don't have to move, why destroy you're credit by walking away?
While I agree, I have heard that it's possible to get beyond a BK in as little as 2 years.
When will the govt learn to keep its nose out of the housing market? If the city wants to help police officers buy homes, provide them with down payment assistance as part of their compensation. I don't have a problem with that, but the 99 year land lease idea is just asinine.
"If you're current and don't have to move, why destroy you're credit by walking away?"
You either destroy your credit, or lose $300K+. Not an easy choice, is it?
Suppose you buy a $600K house, and they are now worth $300K. What do you do?
It may make financial sense to take the credit hit rather than continue paying for a depreciating asset, whose relative value may NEVER come back to the level of money that is owed in the house.
You can go FHA 24 months after BK, either 7 or 13.
If you are paying 1000 or more a month over the cost to rent and houses around you are dropping, why wouldn't you walk if you hadn't put a lot of money down? Foreclose, rent, save, and live to buy again in 24 months.
It's the people who did the 20% down fixed loans that will feel this the most IMO.
Credit is easy to rebuild as long as you aren't stupid. Overpaying on a depreciating asset is forever (or at least 30 yrs)
"It's the people who did the 20% down fixed loans that will feel this the most IMO."
How many of those are around, 10?
"Overpaying on a depreciating asset is forever (or at least 30 yrs)"
I had a discussion with the wife about this, and it would be a very tough call. Imagine if it makes more financial sense to walk away from your house (regardless of financial difficulties) than to stay in it?
"Imagine if it makes more financial sense to walk away from your house (regardless of financial difficulties) than to stay in it?"
Then, forget about the problem of resets next year...I guess if it's as easy as you say to walk away only to rebuy in two years....that'll creat its own pressure on the inventory levels.
Am I missing something here? Isn't there a mean income test that would prevent most from filing Ch 7 and force most homeowners into a repayment schedule under 13?
Something doesn't add right here...
..unless the difference between rent and mortgage payments is sufficient enough to repay those debts that still fall under Ch 13....
Hmmmm...
ralph - There was an economic study of foreclosures in the news a month or so ago that showed the single most important factor in recent foreclosures was declining home values. Most observers would think it would be inability for the borrower to meet payments, but that was 3rd or 4th on the list. When people don't have any equity to begin with, e.g., no down payment, they are much more likely to walk when they see values sinking. Why keep throwing your money into a black hole?
I suspect that when all the dirty laundry comes out and it becomes clear how fraudulent lenders and mortgage sellers contributed to the foreclosure crisis, one result may be that some foreclosures will be erased from borrowers' credit reports so they can recover their credit rating and buy homes again when the market corrects itself. That doesn't go for speculators and investors who should have known better.
Those who are allowing their houses to be retaken by the bank aren't necessarily going bankrupt. They let the house go, but keep the credit cards. Nothing prevents someone who could pay the mortgage from deciding that it's not worth it.
With bankruptcy some people are staying current on their credit cards and letting the house go. Income tests are only for unsecured loans; mortgages are secured by the house and therefore don't come under the income test.
(Bloomberg had an interesting piece on this a couple of days ago. The banks may have screwed themselves with the bankruptcy reform, as it encourages people to do just this, which costs the banks a lot more money.)
Help me to understand this.
Are you saying that a person who is current on his mortgage can hand the deed over to the bank and then walk away virtually scot-free as far as his credit is concerned? (assumes the property has been kept in good condition)
What's to understand?...If you don't like the negative equity in your property, all you have to do is pay your unsecured debts, walk from your mortgage, and two years later someone will let you make the same mistake all over again. If it works out down the road... you win, if not, the bank loses again?
I don't think so...or banks will begin failing on a daily basis...
There's a catch in here somewhere...It makes no financial sense what's being said here...
Diggin.. SMF and Gwynster hit it on the head.
I agree with you, as a bill collector for almost 30 years, I get a little tied up on the morality of letting it go. However, once I move past that, it makes perfect financial sense.
With respect to the BK laws, fewer than 5% (possibly as low as 3%) of filers were affected by the BK revisions. The high cost of California living is allowing most to file a 7. BK's are increasing at a steady rate.
After this all plays out, I believe it won't be who has had a foreclosure it will be more like who hasn't. That may also hold true for filing bankruptcy.
Banks, credit unions etc. have made it far to easy to rebound from filing bk. For many lenders subprime lending was/is a cash cow. Perhaps we're now seeing that cow has teeth and, hopefully, we'll return to risk based lending.
No, shewrestles, your credit will take a hit if you walk away from your house. But if you don't pay your credit card bills, your credit will take a hit too. What I was pointing out is that the income restrictions on bankruptcy apply only to unsecured credit (credit cards, mostly), not secured debt (houses, cars, installments). So for people who have some income, they'd be better off walking away from the house and keeping the credit cards.
ralph...that being said, I'd say there's no risk in buying a home today...if you make a mistake, it's the bank's problem...a you win/they lose proposition that banks will package up and sell to Wall Street for some sucker to buy and lose his ass on. You might take a credit hit, but you'll get another chance in a couple of years.
If no individual has to be accountable for any debt associated with a home purchase, then why wait if you can afford the initial mortgage payment. You have no risk, outside of a short term credit problem, and nothing but blue sky gains if the market turns in your favor....
This is voodoo finance at its best. PT Barnum must be rolling in laughter...
http://www.youtube.com/watch?v=SJ_qK4g6ntM
Got a laugh here...
Diggin,
I completely agree. Certainly things happen that cause financial problems. Unfortunately, the lenders themselves, IMO, are greatly to blame for the apathetic attitude many barrowers have.
Take a look in the Sunday auto section of the Bee..."we finance anyone."
The whole "fresh start" has gotten way out of hand. (better get of my soap box...) I'll just leave it at lax lending standards, be it cars, houses, etc. these last several years are coming back to haunt us.
LOL @ 'structured investment vehicle'!!
The average person does not know this stuff, though.
"Neither borrower nor lender be."
It sounds good to suggest that people should be responsible and not borrow more than they can afford to pay off. But banks, credit unions, department stores, auto dealers and so on make a lot of money providing credit. I read a while back that GM made more money financing its cars than making them. So the last thing the economic powers what be want is for people to stop spending more than they earn.
Second, the credit system helps to sop up excess production. The world economy can produce far more little plastic toys than can be absorbed by paid wages. Consumption on credit helps to deal with this little problem.
Finally, the credit system in the United States is the safety net that in other countries is provided by the government. Fully 50% of the bankruptcy filings in the US are the result of medical bills. People with inadequate insurance run up credit card bills paying for their chemotherapy, prescription meds and the like.
That's why you can get a credit card a month after your bankruptcy is discharged. You are a warm body.
This bubble has been so unprecedented that the results and after effect cannot really be predicted.
During the last bubble, people did go upside down, but not by very much. A house that sold for $140K went down to $120K or so. A $20K debt, while not nice, is certainly manageable in the long term.
But an excess $200K debt is another matter. That is like buying four nice cars, good vacations, plenty of other toys, etc. It is a good university for TWO kids. The lack of that money can certainly be felt.
Frankly, I know people who are upside down, who are willing to stick it out. But these are not expensive homes. I would assume that those with more money and more financial acumen would be the ones who may simply give up.
anybody could/would say they were current, until they stopped making payments, then walked...eventually. When they walk, or pack it up and leave, is the telling factor, not when they stopped payments. It appears folks can squat for several months during this current typical foreclosure period, where banks would rather ignore their problem, than deal with it. Deciding to "walk" is matter perspective.
"So the last thing the economic powers what be want is for people to stop spending more than they earn."
Of course this is true. Everything, including pop culture and sit-coms that inevitably depict working class people as having middle-class homes/toys and middle-class people as having affluent homes/toys, aims us toward an acceptance of conspicuous consumption well beyond our means. And it absolutely ruins many of us, and that was long before the current housing market problems hit.
Just because "they" want us to behave a certain way doesn't mean we have to meet their expectations, though. It often seems like there is an inverse rule to economics, in that the people who can least afford over-consumption are the ones that are the most likely to engage in it. Probably because they feel the most acutely that they're being judged -- if you really have money, and you really have power, you don't need to play those games.
People were enouraged to buy houses as "investments." When you have an investment that is costing you $1000 per month, what do you do? Cut your losses. That is why people are willing to walk away from their houses. At $1000 per month they might be able to save enough money to make a decent down payment after prices drop. As it is, they are just stuck.
They might face a penalty from the IRS in the form of taxes on the "income" from the difference between the property sale price after foreclosure and the unpaid loan balance. However, the Federal government appears ready to change that rule.
Also, I have to laugh when I see articles about how Sacramento's economy is great because of the government sector. I am a State worker and I can't afford to buy in Sacramento. Every State worker I know who owns a house bought it at least five years ago (before I moved to Sac).
NEW YORK (Reuters) - Blackstone Group LP on Monday reported a quarterly loss from charges and posted a 44 percent drop in real estate revenues, missing analysts' estimates and sending its shares down more than 6 percent.
Blackstone's results revealed how the subprime mortgage meltdown has hit the private equity industry -- and how investors and analysts still struggle to understand the firm's sprawling business.
Blackstone President and Chief Operating Officer Hamilton James said on Monday that banks were nearly half of the way through offloading the hundreds of billion of dollars in leveraged debt backlog clogging their balance sheets.
But he said that only around 15 percent of bank losses in the last quarter were related to leveraged loans, with the rest coming from the subprime mortgage crisis. The situation in that market will likely get worse, James said.
"The subprime black hole is appearing deeper, darker and scarier than they thought," James said, referring to investment banks.
http://tinyurl.com/2s3gcs
Nearly half way through?
Did people walk away from homes in Sacramento in the early '90s during the last slump? I was living in the Bay Area and don't recall. However, I heard that many folks walked away from homes in the '80s in Denver. Just like that - up and walked away. Many of my husband's friends picked up -- no, scooped up-- rental properties at that time.
Speaking of Denver, I was teaching in Cheyenne, WY this past weekend and the drive from Denver to Cheyenne (I-25) convinced me that area is in trouble. In the middle of absolutely no where, not close to any of the towns (Denver, Ft. Collins) were subdivision after subdivision, with lots of unfinished homes. Who is going to buy out there?
As ridiculous as the situation is in Sacramento, things in Colorado aren't much better. I went home shopping up there last winter and although I liked the numbers I was seeing in the Denver suburbs like Aurora, I couldn't believe what they were asking for homes in places like Littleton.
One of the realtors who showed me around said that big money from Texas had brought about the 80s boom in Colorado, but that this latest run-up was due in large part to money flowing in from California.
CO has a bigtime foreclosure problem as well, which has already started to affect some of the 'nicer' neighborhoods.
Michigan and many other rust states, many many people have in the past mailed their keys in to their bank/lenders. The late 80's Houston crash also brought the jingle mail phenomenon out, that may not have happened in Sac - yet, but the early 90's crash in sac was like some one pointed out, a 10% top to bottom and that took 3-5 years. We have seen 40% in the last year-18 mo. Soon people will realise their credit is not worth 200K. A foreclosure will be 100-120 points on your credit. You'd gain 5-10 or so points a month if you have 2-3 credit cards and you stay current on it (approximate numbers from past experience). So 1-2 years and your credit score will be back to the starting point at no cost to you. A BK will stay on your record for 7 years as will a foreclosure. So 1-7 years for total freedom. BTW the bigger pain is moving. 3-10K for a move is likely to be what keeps some people in the house. But you just bought it 1-2 years ago, you wont care. You'd move.
Cool.
Cow_tipping.
Bottomline in all this is that inventory levels get no relief if one adds in future BK's, walkaways, and resets.
It'll be interesting to see what NAR spins this afternoon....
FASB 157 kicks in on Thursday so we'll all get a glimpse of what the financials have on their books that cannot be valued by the market ...should be interesting. Some failure projections are as high as 25-30% of all CDO's and SIV's out there...that could push the problem into the $hundreds of B's.
BofA takes a $3Billion hit today and basically claims it gets worse if the market continues to weaken....
Talk about BK and mailing in the keys. Which one of these institutions is going to be the posterchild for this ailing industry?
From the Bee:
http://www.sacbee.com/101/story/485302.html
"San Juan Unified has lost thousands of students in recent years – more than 3,000 in the past three years alone. As a result, the district has closed 10 schools since 2004."
The dreaded outmgrition due to economic hardship rears it's ugly head again.
Shewrestles -- At the risk of sounding like a Denver booster, I agree that Denver has a foreclosure problem, but I don't think home prices were bid up to the same speculative heights as they were in Sacto. Again, my unscientific indicator of affordability is Craigslists. I type in a max value of $300K and see how many listings pop up. I always get more listings for Denver than I do for Sac. In areas where I would consider living -- Park Hill, Parker, SE Aurora, Wash Park, Highlands, Highlands Ranch, Littleton -- I routinely find what I would consider to be nice (not extravagant) homes under $300K.
Gwnyster, funny you should mention the California economic refugee outmigration. If I and Mr. Watching leave for the Mile High City, some of my younger relatives are considering leaving with us. They've done the math and figured out that even with decreases in the housing prices, Sacramento is probably always going to attract some Bay Area economic refugees such that prices will never reach affordability for them. Since Sacto doesn't have much private industry, gov't wages only go so far and don't always match inflation or cost of living increases.
I predict that, even with the downturn and the increase of Sacto "jingle mail," there will be an exodus of economic refugees, mostly young folks who can't get a toehold on the American dream.
"The dreaded outmgrition due to economic hardship rears it's ugly head again."
That is part of the problem. There is an actual issue that the native population is not growing past replacement level. In other words, most couples only have two children, thereby not adding to future population growth. But San Juan has had a declining enrollment issue for a while.
"there will be an exodus of economic refugees, mostly young folks who can't get a toehold on the American dream."
There are some areas where it already happened. The BA comes to mind. Just imagine what logic must be in play to justify higher housing prices when your population is declining.
Which one of these institutions is going to be the posterchild for this ailing industry?
higher odds list:
Countrywide, (sub)Standard Pacific Homes (both of Irvine, CA), Beazer, E*Trade, Blackstone, and major consolidation into BofA, JP Morgan Chase, and Citi.
Colorado has some very different foreclosure laws. Sudden death like Texas ??? maybe, but check those out, that is why NY, NY and CA are like slow as molasses in a NY winter but other states clear the dead wood very very rapidly.
Sac to BA commuting gets old ... faaaaaast, with gas at under $2 a gal, I wasn't able to manage it with $$ not a factor.
Sac may benifit from the "Working from home" phenomenon that probably will catch on in BA before any of the country, but then again, they may just prefer to hire work from home employees - In India like they already have.
Effectively Sac and BA prices will be mathematically related and would move in step with each other.
CA has outmigration with outflow both into the US and into the asian rim. Sac is hoping that they are catching a part of that outflow.
Cow,
Sac caught the first wave of BA outflow in 98-99 and then the wave just keep moving farther and farther back.
Funny that you mentioned moving to the Pacific Rim because I just had a faculty member confirm that he's retiring in June and moving back to China.
I had another faculty member leave in Sept, moved to Germany where he already had family. I can't help but wonder if the decline of the USD was part of the motivation.
Speaking of migrations.....If I were really planning for the future, I would actually buy further north (say Madison WI), cause by the time I am able to retire, global warming should be in full effect.
Well most of my ex-coworkers from CA are now gone. To India or to china, whole companies have left and gone. If you think about it, your employer does pay your mortgage. What would make them pay 300K more for you to live in BA, instead of you living in say Kansas, unless they never intended to pay on that 300K for more than 1-2 years. AKA, flipping employees (off).
Cool.
Cow_tipping.
Does anyone else think the stock market bears a striking resemblance to winter of 2002?
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