Monday, January 28, 2008

60 Minutes: Stockton's "House of Cards"

From CBS News (video) (hat tip Tyrone):

It sounds complicated, but it's really fairly simple. Banks lent hundreds of billions of dollars to homebuyers who can't pay them back. Wall Street took the risky debt, dressed it up as fancy securities, and sold it around the world as safe investments. It sounds like a shell game or Ponzi scheme; in some ways, it was a house of cards rife with corruption, greed, and negligence.

And as correspondent Steve Kroft reports, it started in places like Stockton, Calif. Stockton is a city of 280,000 people in the Central Valley; 80 miles east of San Francisco and 80 miles north of San Jose. In many ways, this is ground zero for the current financial crisis and a microcosm of everything that went wrong. A few years ago, it was one of the hottest real estate markets in the country; today it is the foreclosure capital of America.
From the CNNMoney:
The risk of foreclosure is on a rapid rise nationally and, with a possible recession at hand, this spike in mortgage-defaults could last for years. A report released Monday by First American Core Logic rates foreclosure risk for 381 metropolitan areas, and found that the risk of foreclosure has jumped 22 percent from January, 2007, and 9 percent from three months ago.
The price declines are biting hardest in California, especially the Central Valley cities that had recorded outsized price gains during the boom. Of the top 10 large cities facing the highest risk of foreclosure over the next six months, five are in California. Of the 36 markets nationwide undergoing double-digit price declines, 22 are in California.
Top 10 risky cities
The markets facing the highest risk of foreclosure
[Annualized home price appreciation]

#2 Stockton [-18.7%]
#7 Sacramento [-15.1%]
From the Stockton Record:
The telephone began ringing at 6 p.m. Thursday and didn't let up for the next two hours as eight members Financial Planners Association of the San Joaquin Valley offered free financial advice to callers. "This is the busiest we've been," said Teresa Mandella, a financial planner with Ameriprise Financial.
Frank Mandella, owner of Meadow Lake Mortage (and Teresa Mandella's husband), handled many calls from people unable to meet rising mortgage payments or worried about falling home prices.

"All the problems I dealt with tonight dealt with option ARMs," he said, referring to adjustable loans in which borrowers are offered a selection of payments, including at interest-only or lower levels...He also spoke to callers worried their home's value had fallen below the mortgage balance, even though they could still afford the payments.
From the Sacramento Bee:
When the economy sours and gold soars, there's one business segment that actually sees more traffic coming in the door. Welcome to the world of pawnbrokers. Amid the economic queasiness surrounding housing, jobs and credit, local pawnshop owners are seeing evidence that more money-strapped customers are dropping off their valuables to get fast loans or unloading their gold for a quick windfall. "The demand for loans is way up, because the economy stinks," said John Appelbaum of Sacramento Loan and Jewelry Inc. on 10th Street in downtown Sacramento.
Out in suburban pawnshops near the American River, the flood of pawned construction tools bears evidence of the area's protracted housing slump. "You can usually tell (how) the economy (is doing) by how many tools we get in," said "KC" Carvalho, of Carvalho's Loan in Sacramento's Foothill Farms area. "We now have more tools than we've ever had. Ever." Carvalho has devoted an entire section of his store to tools brought in by idled construction workers, from air compressors to heavy-duty drill sets.
From the Sacramento Business Journal:
Bold moves carried Reynen & Bardis Communities Inc. into the top tier of Sacramento's firms during the housing boom, but the longtime developer's full-throttle approach to buying land has backfired through the bust. The company is accused of missing payments on $34 million in debts tied to land acquired as the housing market slipped. It ceased construction last month at its three divisions -- Sacramento, Reno and Visalia -- and has hired a restructuring and turnaround specialist to increase cash flow and strike new deals with the developer's many lenders, according to sources familiar with the company's financial position.
While land brokers declined to discuss Reynen & Bardis directly, they said Sacramento builders are actively seeking partners to stay afloat. "That's what people with excess inventory are doing right now; they're reaching out to the investors," said Randy Grimsman, a land broker with CB Richard Ellis. As for investors, "They're waiting for the bottom before committing. When they feel the deal is right, that's when they're going to move."
From Keep It Real in Sacramento:
[A]fter two plus years of downward real estate trends, there are now industry professionals who have gone in the other direction and seem to pride themselves on how “gloomy” they can make the market appear. I didn’t attend but got a report from a title company sales officer that Mike Lyon of Lyon Real Estate made such a “gloom and doom” forecast yesterday in Roseville. My contact is a sale person; he makes his living selling his company’s service to real estate agents. He told me the Lyon talk was so depressing he had to leave.


cole said...

surprise, surprise

two years ago here, or there abouts, someone posted parts of an essay by George Soros, in which he outlined all that would occur and called the use of your home as a credit card, "The Wealth Affect/Effect" all came true...

The price buildup, beyond the normal percent increase was driven by absolutely nothing other than greed and BS...

Now the results are everywhere and they will also come to Midtown/Downtown to the 1200 square foot "Lofts" priced at well over $400,000 all based the amenities of "urban living"...(yeah right, in Sacramento, give me a break)

The Sac Bee/Shallit/Realtor/Craig Nassi/Sacca/Beazer/Dunmore BS, hype and just outright lies has come to end...

Diggin Deeper said...

When a market gets this bad it usually enters into an oversold condition. It's intriguing. On the sidelines, most people don't want to walk a "frozen rope" for fear of making one big mistake.

Sentiment is so negative, price capitulaion is gathering momentum, could an actual bottom be closer than most would like to believe?

Very intriguing!

Jacob said...

maybe we will be closer to a bottom in 09. I will be waiting to see how all the 08 resets effect the market. Last I saw there were more resets in the first half of 08 as all of 07.

We shall see. There is nothing pressing me to buy right now.

smf said...

"could an actual bottom be closer than most would like to believe?"

The crystal ball gets clearer after the summer 08 is over.

I still say that the last gasps of hope will be extinguished then, with a bloodbath to follow.

alba said...

diggin, you may be trying to "will" the statistics into a justifiable bottom. Most of us may not see the bottom when it happens, but we will in our rear-view mirrors. It takes years for the news to sink in about the enduring downturn, and it takes an earthquake to shake the news into most folks, and convince them. Truman: Its a recession if your neighbor's out of work. Its a depression if you are. Make sure you have a financial picture that endures through the worst, reset your priorities (with less disposible income), then wait as long as you can. You can't go too wrong planning to buy a home in 2009, and re-evaluate your finances then. None of us are genious enough, or flexible enough, to buy and sell our homes at the bottom and's just circumstances.

BMac said...

I just watched this on the Tivo. At the end they mentioned the packages that these plundering CEOs get. I couldn't help but come up with this crass, unclever, yet entertaining line....I can just see John Edwards using it on the campaign trail, can't you?

"These CEOs get golden parachutes while the average American gets a golden shower!"

Diggin Deeper said...

alba...I'm not suggesting we've hit a bottom, it would be foolish to do so. Only that the sentiment needle is on "empty" and that could very well be signalling that a bottom is near. Once again, classic contrarian opportunities exist when there's "blood in the streets."

I'm not going to get in the way of the next 6 month period when we push over the top with foreclosures. But if the economy holds up(recession vs depression), I'll begin to get more serious about buying again as we process this next foreclosure wave through the our area.

wrong moves said...

As far as recession goes, here is what I see in my neighborhood. One neighbor in construction has been out of work 6 months. Another neighbor is a high end, freelance jewelry designer. In 05 there was always a Ferrari or Bentley in his driveway when a client stopped by. I don't think he has sold much lately. The other neighbor is a manager for one of the high end grocery stores. He said places like Winco and FoodMax are killing them.

Less money is floating around from what I see, but I don't know many people.

Diggin Deeper said...

Home prices in 10 cities drop a record in Nov: S&P

Prices are tipping over across the country. Just as there was a mania phase when prices rose, we're seing the "manic" phase (just as powerful) in this market.

It just confirms that real estate as market is no different and completely subject to the same fundamentals, as any other market driven by supply and demand. Once again, can the bottom be that far off?

Ryanpeecrest said...


Just like the discussion on SacRealStats, siphering through the MLS data is killing me!!! I keep waiting for the dump of inventory in Jan. / Feb. and it ain't here yet. Where is it???
I know it is auction season - is this where everything is being held? Have the lenders and RE offices collectively made a decision to hold everything off the market to try to artificially induce an early bottom??? This is what worries me.

I keep tracking daily inventory of homes on MLS since Jan. 10th in following areas: Sac City, Fair Oaks, Cit. Heights, Orangevale, Roseville, Rocklin, Carmichael, Loomis, Auburn, and Lincoln.

So far in january, sales and/ or pending have outperformed new inventory added to the tune of maybe 1-2% of overall market inventory (at start of 08').

I just want to see these reo's rain on the market - and I am getting tired of waiting. Only area I think they can't artificially hold back the flood of product is Sac. CIty - just too many damn foreclosures.

Let me know what u guys think. I am thinking about May-June for myself to get in now - I have revised this from Aug-Oct. in my late last years scenario. Thanks.

Diggin Deeper said...

No need to panic in this market...why not let the next wave of foreclosures take their course over the next 6-8 months and re-evaluate then. If it takes several months for NODs to turn into actual foreclosures, inventory increases should show up sometime in July/August.

smf said...

why not let the next wave of foreclosures take their course over the next 6-8 months and re-evaluate then.

I think that the first wave of foreclosures occurred with those buyers and flippers with less financial means.

The next wave will be those with bigger albatrosses around their necks.

Which brings me to my next point, and anyone else who cares to research this further is more than welcome.

I noticed that in higher priced areas, such as Granite Bay, there seems to be a large amount of spec. mansions.

The first page of GB expensive homes in MLS appears to be about 80% or more speculators. Out of 25 listings, only three were built prior to 2000, with the vast majority built after 2003.

This seems to occur in many areas. I think the overhang and glut of expensive homes is just horrific.

In theory, building a larger home provides a larger profit per parcel of land.

In reality, the excess is very, very large, and this is the next shoe to drop.

Diggin Deeper said...

smf...agree with your assessment. This next wave should be about half again as large as the first one. Plus the added pressure the economy will put on borrowers coupled with consumer sentitment in the tank, and this one just might dwarf what we've seen so far. It'll will be interesting to pick through the rubble, sometime later summer early fall. Ought to be some real "steals" to choose from.

Patient Renter said...

Wow. So I just read Mish's post on this whole walking away thing this morning, and he pointed out a new company set to profit from the phenomena:

Patient Renter said...

Jacob said:

"maybe we will be closer to a bottom in 09. I will be waiting to see how all the 08 resets effect the market."

Closer, sure, but still nowhere near the bottom. Check out the credit suisse ARM reset chart to learn why.

alba said:

"None of us are genious enough, or flexible enough, to buy and sell our homes at the bottom and's just circumstances"

For the 50 billion'th time HOUSING BOTTOMS ARE SEVERAL YEARS WIDE!!!!!!!!!!!!!! Look at a graph - it's not hard to "time" a housing bottom, no matter how many times you read otherwise.

Patient Renter said...

I swear I just posted this the other day, but I guess I'll have to keep posting it until it sinks in.

Housing bottoms are WIDE.

smf said...

"Ought to be some real "steals" to choose from"

Depends...since most people forget that a bigger house is not only a bigger mortgage, but much bigger utility payments. When we bought our last house, we added about $250/month more for upkeep and utilities. A larger 2-story home is even more of an energy hog. And a pool adds about $100/month, not including maintenance.

Hence, the price of some larger homes would have to come down a LOT before we would even consider them.

"None of us are genious enough, or flexible enough, to buy and sell our homes at the bottom and's just circumstances"

Bought my house in 1994. It appreciated NOTHING for almost 7 years.

Diggin Deeper said...

PR...If we sidestep depression, and have deal with a longer term recession, it'll be a long and slow grind. All bets are off if the reverse occurs.

Imho the very best properties will be snapped up first. The best deals will be very early in the bottoming process because market prices will tend overshoot the mean. That period should provide a narrow sweet spot that will broaden out into a long period of stagnation. This is where I want to buy.

To me a buyer stands to gain more buying in an oversold condition than to wait for the long bottom bumping to occur.

G Spot1 said...


Not sure what you are seeing in Granite Bay is "speculation" - well, unless you want to call anyone trying to sell within 2-3 years a speculator (I don't use that term unless there was an intent to flip when they purchased).

I think what you are seeing there is the early signs of distress in an area that hasn't seen nearly as much defaults and foreclosures as neighboring cities. I really think these are people with good incomes and credit but had not business buying $1m homes. They want to stay in their homes but they can't. I'm sure they can hang on for awhile longer by maxing out credit cards and raiding 401ks, but it should be interesting to see what happens when we have banks trying to unload $1.2 million homes in Granite Bay. They won't be $1.2 million anymore....

Patient Renter said...

Good point DD. The misses and I are somewhat considering moving up to the Northwest area which is sadly trailing our decline by a year or two - so even though we've made a lot of progress around here, I'm not sure we'll even stay.

I haven't been able to find much good data for that region...

smf said...

"Not sure what you are seeing in Granite Bay is "speculation" - well, unless you want to call anyone trying to sell within 2-3 years a speculator"

First of all, I see dates. When 22 houses out of 25 are recently built, I know something is NOT normal.

Second, some homes are empty, or built after 2005. I know of at least two mansions in Fair Oaks that have been on the market that long.

Third, look at the furniture. A staged home LOOKS staged. When I see a kitchen devoid of over the counter appliances, with some funky decorations in place, I know their staged houses.

Fourth, people don't live in real staged homes.

This was a pretty small sample, and looking at other areas, it seems that this applies as well.

In my conclusion, IF we were to have $$$ to build such a house, WE WOULD DO IT OURSELVES.

Historically, large custom homes were never speculative.

alba said...

yes, I misspoke on my last pst. As I've said several times in previous posts, I agree the bottom will be several years. I expect here will be a window of opportunity when the panic will rise to a frenzy, with potentially some good deals to be had; then flatten out to a lull for years. Human nature.

alba said...

smf - you can probably make this thought more accurate, but: production homes; land prep, permits, build - 1 yr. Custom home; land prep, permits, build - 2+ years. Many of them were just behind the curve and finished at an untimely date. I see many $1M+ daily that were finished 2006-2007 on Clubhouse Drive in Rocklin. Many have not been lived in; some were lived in by "investors." Most all are on MLS; some for more than 365 days. Bad timing!

SacramentoCrash said...

These brokers are always two years behind the curve!