Monday, November 05, 2007

"To say the bubble has burst is an understatement"

From the Sacramento Business Journal:

The meltdown of subprime mortgage lending has changed the banking landscape for more than just individual high-risk borrowers. Even homebuyers with high credit scores have encountered tighter lending criteria. It's natural to wonder whether the ripples will extend into business lending as well.

Technically, they haven't yet -- banks say they have not tightened up their criteria for business borrowers. But while the standards might not have changed, the economy has. It's getting tougher for some businesses to meet the old thresholds. For many small-business owners, especially, the shockwaves from the tighter mortgage market have wiped out a longstanding source of cash: the entrepreneur's own home equity.
"Before the housing market went south, most people who were borrowing money to start businesses were using equity in their homes," said Panda Morgan, director of the Greater Sacramento Small Business Development Center...For those whose home equity has withered away, a loan is now a matter of presenting a bank with solid credit reports and business plans. And collateral. "If you don't have collateral because you are overextended, you can't get the business loan," Morgan said.
Yet even as late as June and July, entrepreneurs working with the development center were still able to tap the equity in their homes for loans. "Even though the market changed about a year and a half ago, the fallout has not taken effect until recently," Morgan said.
The housing market is not the only segment of the economy to sag. Office leasing in Greater Sacramento plunged in the third quarter, the first such drop in more than three years. Commercial real estate brokers say retailers such as furniture stores are ailing, too. The closer a company is to the housing market, the more likely it is to feel the pinch.
From the Star Bulletin:
Central Pacific Financial Corp., which three months ago assured investors it had no exposure to the subprime lending crisis, said yesterday that third-quarter net income plunged 55.8 percent after it took a $21.2 million provision for loan and lease losses due to a rapid downturn in California residential construction.

Clint Arnoldus, president and chief executive of Central Pacific, said the bank was hurt by the subprime downturn indirectly, after national homebuilders unloaded California inventory at 10 percent to 30 percent discounts and nearby local contractors who Central Pacific had provided loans to were left without buyers.
Joe Morford, an analyst with RBC Capital Markets, called the earnings "disappointing" but not necessarily surprising given Central Pacific's exposure to some of California's weaker markets like the Inland Empire and the Central Valley regions, where there have been significant declines in home values.
From the Tracy Press:
The rise in home foreclosures is an opportunity for people who want to buy homes now. About 20 of those prospective homebuyers turned up at the office of Fallavena & Willbanks real estate brokerage Saturday morning to see what kinds of deals they could get on houses that have been through foreclosure...Fallavena and three other real estate agents from the office led people on a caravan through Tracy neighborhoods to look at houses that are back on the market. Some of them are among Tracy’s newest homes.
The previous owners of a three-bedroom house on Maison Lane in the Edgewood subdivision apparently didn’t live there long enough to put in any landscaping in the backyard. "They moved in long enough to put up a few pictures, then the mortgage adjusted and they were out of here," said real estate agent Claire Trinkle, who helped organize the tour.
In one recent sale, the previous residents took anything that could be removed, including the dishwasher, stoves and the kitchen sink. And then, apparently angry at being forced to move out, they smashed the countertop tiles.
From the Sun-Post:
A committee will recommend that Manteca buy land where below-market-rate housing can be built and sold to middle-class folks, such as teachers and police officers. After months of falling home prices, a workforce housing committee will deliver its final report next week against a much less urgent backdrop... With many houses now selling for $100,000 less than the asking price in February, the committee has seen much of its work taken care of by a declining market....

“In reality, that is just a market fluctuation, and it doesn’t really address workforce housing,” [Ben] Cantu [committee chairman] said. “The slump that we’re in now hasn’t come down enough. Workforce housing is in the realm of $250,000 to $300,000. Even houses that are being repossessed sold for $400,000 or more.”
From the Modesto Bee:
Two years ago, economists, Realtors and others carried on a lively and unresolved debate about whether skyrocketing housing prices constituted a bubble -- a bubble that was destined to burst. Today, in Stanislaus, San Joaquin and Merced counties, to say the bubble has burst is an understatement. Plummeting prices, a major slowdown in home sales and widespread predictions that things will get worse before they get better suggest that this is something far more serious than a routine market correction.
It's obvious now that the demand for valley housing was artificially inflated by speculation and subprime mortgages that put many people into houses they couldn't really afford. And for all the new homes that were built, very few were truly affordable to those with typical valley incomes.


smf said...

"And for all the new homes that were built, very few were truly affordable to those with typical valley incomes"

THIS is what people need to get thru their RE tinted glasses.

Those loans that allowed people to buy homes usually represented the LOWEST price that homeowner would ever pay. Any adjustment would ALWAYS go up, regardless of the movement of the interest rate.

And those who bought and KNEW that they could not afford the house for the long term are another set of problems.

What I could never understand was the thinking of purchasing a home and allowing appreciation (not principal payment) to allow them to move up later.

I mean, if your home appreciates a lot, it is a given that your move-up home will do so as well.

Jacob said...

Well your home will go up, but the other home you want will not... I dunno, most people didn't really think about anything except wanting to get in at any price before it was too late.

I dunno why I pay all my bills on time, have no debt, only buy what I can afford and save most of my money, so eventually I can buy and afford a house...

At least I dont have to listen to people telling me what I was missing out on anymore...

Prices got a long way to go. And I don't mean to get to the historic averages, but even beyond that since there are more homes than people can buy and investors can rent even at the normal prices.

Diggin Deeper said...

Real wage increases drive affordability and create demand. If a buyer cannot afford to buy, or perceives that prices are too high, these are very simple and correctable problems that will solve themselves over time. I cannot find where real wages, across the mid section of the economy, have risen to take the affordability factor higher than is was 5 years ago. It would seem that prices have to meet the largest segment of the buying public, at those levels, before the market can find some legs. When you add in destabilizing features such as foreclosures, burgeoning inventory, and poor buyer perception, prices reductions are the only options availbable to sellers.

wrong moves said...

"It's obvious now that the demand for valley housing was artificially inflated by speculation and subprime mortgages that put many people into houses they couldn't really afford."

COULDN'T REALLY AFFORD. This is Sacramento, not LA or NYC. Median homes at 400K+?

SMF, Jacob, Diggin', I agree with everything you all said.

Every rational, logical bone in my body tells me that prices should be free falling. In my reality though, the 50+ houses that I am watching are only dropping by token amounts. Last week when I went through them all again, 4 sold. All but one of them were sold for asking price, the other dropped only 10000. I have even been recording when the prices dropped on the MLS. Prices seem to be holding up on the high side.

I even wrote a few days ago of a coworker who lowballed a builder down to 150 ft2, but for a tract home, I still think that is a tad too high.

I just keep getting beat down. All of my solid (to me) logic and predictions keep getting slammed by reality which my bull market associates inevitably rub my face in.

Oh well, my rent is still 45% of what I expect to pay PITI.

Cmyst said...

I feel a lot lot you do, Wrong.
If it weren't for the lenders shutting off the spigot of bad loan products, buyers would still be making the same stupid mistakes. People get used to the ridiculous asking prices, and then when prices drop a little they think they're getting a real bargain.
The correction mechanism was built in to this debacle, and that's what we're beginning to see now. When the payments adjust -- as they must, because lenders are in this to make money -- people simply can't pay.
There are so many problems with all this that continue to keep prices high. Investment banks don't want to write down those loans and take the loss, the REIC people don't want to lose their high earnings, the builders bought land high, and re-sale owners HELOC'd their equity to zero.

Diggin Deeper said...

The market cannot fool the law of supply and demand forever. That's why it might be better to be patient and just wait out what's on the horizon.

Those that buy today have had plenty of time to the math and make a good decision. More power to them if this is their entry point.

The bigger picture is pointing to an economy that's beginning to struggle as Corporate profits are not nearly what they've been. We'll see if the consumer is going to spend enough to keep us from a potential recession, and with Christmas less than two months away that picture should clear up very soon.

YoY prices have been escalating downward and there's no sign of them bottoming much less stabilizing.

Throw in energy and food costs and there are just too many factors that are moving against this market.

Patience pays when you let the market come to you.

wrong moves said...

Yes, I agree the market SHOULD move down. As seen at 1090 Montague Ln, 95648, $95.6 per ft2, a portion of the market is dropping. Unfortunately, I don't want to live in foreclosure central.

I don't even think my desire is unrealistic either. We only want about 1800 ft2, but need a 3 car garage. The houses we are tracking just aren't coming down (enough). I understand all of the comments pertaining to why they should fall, but mine just are not.

Cow_tipping said...

They will fall, eventually, the more desirable (just remember this, what is desirable to you may not be desirable to others) You want 3 car gar, others may not care, the slower they may fall. Just remember the house you want and the house you dont want are mathematically related in the steady state. Just that they may move up or down at different speeds. AKA, in a steady market, if your preferred house is 200K and the one you dont want is 150K and they have sold at that price, likely that when yours climbs to 300K with the rise in $$ backed by fundamentals, the other one will be at 225. Just that yours may hit 300 a lot before that hits 225. Somehting like that. Just dont let the realtors say that's what everyone wants. If that was the case, builders will have built 10 times these as the others. Like my neighborhood, over 50% of the total houses are basically 3 models repeated over and over. The un popular ones there is 2-3 in a 200 home neighborhood. So, supply is higher if its truly popular or the fact that its what every one wants is a lie, just like the "everyone wants to live here" lie.

SheWrestles said...

Wrong - You're not wrong at all. What I'm seeing out here in 95648 is that the homes in the size range you're looking for are still priced way over $150/sf.

Cow - Builders suck. Is there some law that says they can only use 3-4 floorplans per neighborhood? *sheesh*

rocklin renter said...

Is there some law that says they can only use 3-4 floorplans per neighborhood? *sheesh*

Yes. It is the "law" of diminishing returns.


smf said...

You must remember that the vast majority of those who played in the .com bubble were doing so with 'play' money.

The money that I used came from my retirement account. Therefore any win or loss did not affect my day-to-day living.

Those who gambled in this market first started with essentially nothing in the game.

Now they are forced to place plenty of their skin on the game to just get out.

I know I would be stuck in limbo if I find myself several thousands dollars short of money.

mark said...

My mother used to say "Laugh now, cry later" which is a nice way of saying that when you enjoy yourself carelessly and over - indulge you will pay for it later.

When people go out and pay $450.00 for a 900 square ft. home in CA and the bank is actually is STUPID enough to loan it out, well then, someone has to pay the price.

The thing that scares me is Bush and Hillary are calling for the Government to step in and do something which is a nice way of saying the tax payers will have to foot the bill in this ever increasing communist environment.

Communism is, after all, a government system of gathering everyone's money and spreading it out evenly. I think everyone that has gotten themselves into this mess should foot their own damn bill on this rather than forcing this problem on the next generation and the people like my wife and I that always lived within our means and lived in affordable houses and places that we could actually afford.

Believe me, we lived in some crappy run down apartments, trailers and farmhouses, so don't think we had it easy.

But we suffered along with what we had in order to make sure we could afford to pay for what we bought.

I guess that's what bugs me about this whole situation. Nobody wants to be responsible and pay for their own mistakes.

mark said...

Sorry,I meant $450,000 for a 900 sq ft. home in my previous comment...