Thursday, January 03, 2008

"The Good Ship Sacramento" Takes on Water

From the Sacramento Bee:

Up until 2007, the good ship Sacramento appeared to be sailing along smoothly, propelled by a pair of seemingly steady winds – state government spending and real estate appreciation.

Yet it was only a matter of time the winds changed. The subprime storm has now arrived. The regional housing market is sinking, dragging down the budgets of state and local governments. Crime is on the rise in some areas. For the first time since the 1990s, the capital region finds itself pressured to cut costs for social services and community policing at a time when people need those programs most.
From the San Diego Union Tribune:
In regions where lots are in good supply, such as Riverside, San Bernardino, the San Joaquin Valley, and the Sacramento area, “there will be a major change in the home building mentality,” [California Building Industry Association's chief economist Alan] Nevin said. “Lots, for the most part, have declined substantially in value. They will be written down to more practical value levels.” That means home builders will be able to build substantially smaller homes and sell them for substantially lower prices, he said.
From CBS 13 (video):
The foreclosure crisis is bad enough for people, but homeowners' pets are suffering as well. A growing number of pets are being left behind in the foreclosed houses they once lived in when their owners move out.
From Sacramento News & Review:
Anyway, if you feel a little un-trendy every now and again, console yourself with the thought that there’s one current trend on which Sacramento has been way out in front: the current housing bust. In that, according to a November article in Forbes magazine, we lead the nation, with prices that have fallen 10.5 percent—outpacing any other city. Be proud, Sacramento, be proud. Or, if that doesn’t seem like a matter of pride, let’s all at least admit that being trendy isn’t everything. Maybe you can’t sell your house, but at least you can console yourself with wine and cupcakes.
From the Modesto Bee:
John Diaz, independent real estate broker in Modesto: Diaz said the market likely will drop further in 2008, as foreclosed homes continue to hit the market. Rising fuel prices have reduced the appeal of Northern San Joaquin Valley homes to Bay Area commuters, he said, and city and county leaders have failed to attract the employers that would keep workers here.

People in real estate differ on when the market will rebound. Some say the sales numbers could rebound in 2008, as reduced prices draw in people who were priced out during the recent boom. Some say 2009 or 2010 is more likely. Diaz said it could take even longer.
From oftwominds.com:
The housing market won't turn around in 2008--or 2009, 2010, 2011, either. The really smart folks will be saving their money for 2012 or maybe 2013, when years of grinding losses will have stripped the assets of everyone who bought real estate with the idea of retiring on the proceeds. At that bottom, everyone will be disgusted with real estate, both residential and commercial, and no one will be dumb enough to sink dead money into an asset class which continues to decline in value year after year. At that point, say Q1 2013, then housing will again become a buy.
...
Exurban burnout and job losses will take a toll. Take two hideously long commutes to distant jobs, a centerless, lifeless suburb in the middle of nowhere, take away one job and presto, you get an empty subdivision of essentially worthless McMansions nobody wants at any price. Add a dash of decay which acts as a catalyst, and you speed up the abandonment of the exurb.
...
Houses built where they should not have been built will be abandoned. Large swaths of known floodplains are now covered with subdivisions in the Sacramento Delta region...Back in the good old days of say, 2007, governments might have reckoned they had the funds to rebuild dikes and other engineering wonders to protect a few thousand new homes. But as the economy sours, governments are suddenly short of funds. And as people leave those distant suburbs, then the stark reality will become apparent: it isn't worth tens of millions of dollars to protect a few thousand homes (many standing empty) which should not have been permitted in the first place.
From The Times:
A small 1950s bungalow in Stockton, California, is up for sale for $169,950. Sitting off a quiet road dotted with American flags, the Funston Avenue home has two bedrooms, one bathroom and a covered porch. It was built as part of President Truman’s Fair Deal, a federal promise to guarantee economic opportunity and housing for America’s servicemen returning from the war.

Sixty years on, however, the American Dream has turned into a nightmare. The bungalow’s value has fallen by $110,000 in two years and the family who live in it have fallen so far behind with their rising mortgage repayments that they have been foreclosed by the bank. This family’s story is a common one in the neighbourhood, which houses the bank workers and civil servants who zoom up Highway 205 to commute for two hours each day to and from the pricier city of San Francisco.

According to David Sousa, the real estate broker who is selling the house, the number of properties up for sale in the area has risen from around 1,800 two years ago to about 8,000 now. Most of those properties are in the process of being repossessed by mortgage lenders. Moreover, there is no sign that the residents of Stockton are past the worst. Their lot seems a far cry from the town’s sunny motto: “Stockton’s Great, Take a Look!”
...
“One of the biggest challenges we face is that the number of foreclosures have left the market saturated with unsold property,” Mr Sousa said. He estimated that prices were falling at “between half and 1 per cent a month” and said that that local mortgage lenders had been so overwhelmed by the number of repossessed homes on their books that they are trying to sell, that real estate brokers – estate agents to you and me – cannot get a decision from them for at least 30 days over whether they will accept an offer price.

18 comments:

campbeln said...

Is anyone seeing these great lot prices in Sacramento? I'm looking to jump on a nice lot in SacTown but nothing seems to be dropping (north side generally- Rocklin, Roseville, Orangevale, Fair Oaks, Citrus Heights, Granite Bay [heh!], that general area). 'Course I'm not a builder looking for 10 lots, but from what I've seen nearly nutin' is selling and even less is anything approaching a good deal. Most seem to be stuck to 90%+ of their highs!?

Diggin Deeper said...

"Exurban burnout and job losses will take a toll. Take two hideously long commutes to distant jobs, a centerless, lifeless suburb in the middle of nowhere, take away one job and presto, you get an empty subdivision of essentially worthless McMansions"

Kind of sums it up. $100 oil, soft commodity inflation, and falling state revenue make this area particularily vulnerable to real estate price declines. Median incomes buy median priced homes. If recession (job losses) pressures the area, then the multiple of income to a home's median price should fall taking the median price with it.

Payrolls rose 18,000 in Dec

http://news.yahoo.com/s/nm/20080104/bs_nm/usa_economy_payrolls_dc_2

"The unemployment rate jumped to 5percent, its highest since it matched that rate in November 2005, from 4.7 percent in November."

We're hitting the 2nd peak season of foreclosure activity and mortgage resets. Numbers of mortgages resetting over the next several months should overlay another chunk of REO's on the inventory roles.

"U.S. Consumers Late Payers on Most Loans Since Recession"

http://www.reuters.com/article/marketsNews/idUKN0321771220080103?rpc=44

"Americans are falling further behind on consumer loans, with late payments rising to the highest level since the nation's last recession in 2001, data released Thursday showed"

Too many negatives out there to offset any positives that may come our way. Recession, imho, is upon us, only this time there's no credit line left for the consumer to bail us out. Add in higher inflation on everyday necessities and it could take awhile before we get back on a growth track.

AgentBubble said...

campbeln--Land prices are still way to high. I have a parcel listed in the country. It's been listed for about 2 years. The owner paid $300K for it 2 years ago. He tried to immediately flip it for $450K. We got an offer for $400K and he rejected it flat out. Not one offer since. We're now sitting at less than $260K with no interest at all. People are realizing it's cheaper to buy an existing home in the country than to buy land and build your own. Until the land sellers accept this, expect higher land prices.

sacramentia said...

Back to smaller homes is likely path out of this. Guess an average guy doesn't get to live in a 3500 sq ft home after all - that never made sense anyways.

Even if you had free land, the median buyer here in Sacramento is looking at a ~1600 ft home to maintain reasonable debt to income levels, pay the development fees, and be profitable enough for a builder to build. And land isn't free.

I made a bunch of assumptions so the 1600ft number can be argued, but the houses have to get smaller.

And so do the SUVs... $100+ per tank is getting old!

Buying Time said...

Is it me...or are listings just flooding the market right now. Over the last 3 days I have seen tons of listings come on the market in my criteria.....

This is getting interesting already!

Gwynster said...

Nope, Not just you BT.

In my little search area, I had 23 new listings (2 were relistings) in 3 days. 36 and 3 over 7 days.

Patient Renter said...

That oftwominds commentary regarding the floodplain area (Natomas) is brutal. I hesitate to ever discuss that stuff since wherever I am, at work or wherever, there's always at least one person who lives there now.

Did the state promise levy upgrades? 14 billion in the hole...

Embdddsgnr said...

BT, Gwyn:

I'm seeing just the opposite in
the 3-zip midtown/east area; we're
down to our 12-month low in the MLS.
95816 as of today is 5 lower than
Tuesday (~5% of listings). With new
listings being added and sales rate
also low, I think many folks are
just taking them off for now. Maybe
they don't really need to sell, or
maybe they're hoping for the spring;
who knows?

This area is stronger than many, but
it will see its pain too. This year
is going to be. . . interesting.

Gwynster said...

Downtown (95814,95816) is part of my search actually, i just don't see much on it though things have been creeping back on little by little. Places where I see more movement is in Yolo. Lots of homes that went off the market months ago are back on as REOs, even in Davis.

neverowned said...

Hey all.

I have been reading for some time.
I have revelled in the joy of this housing decline to reality, and have little pity for the idiots who leveraged themselves and their families over their heads. I worked my ass off at hard labor and construction jobs, and I can't count how many flippers I helped remodel their homes. But, by some stroke of devine intervention, I always talked to the ethical mortgage people, and they laughed when they saw I made only in the $25/hr range.

Now I am getting closer to being in the driver seat. First time home buyers program. Home prices are getting closer to what I need. But, I have an honest question for u guys:

"When Is the bottom - and when is it safe for me to buy"

I should preface this query with the fact that I am not ready yet, and do not plan to buy until I have the reserves and loan I am happy with (and home price). I will be ready about 06/08.

Can u guys keep me posted on whether I have mondo time on my hands, or am I hitting it while the blood is running in the streets in June.

Well, looking back at this post - I guess you could say I've built up some resentments from working on so many homes in Eldo Hills, Wexford, and FOlsom, all owned by people who were 5-10 years younger than me. Looks like things have changed a bit since couple years ago. I hope they don't feel so bad for me now that I don't own yet. I feel quite good about it. HA!

KTM 300 said...

Neverowned-

I don’t work in construction, but we are in identical situations. In my opinion, $25/hr is very good money. $25/hr is not easy to get in Sacramento, California. Many people with masters degrees do not make $25/hr. I don’t understand it either; I too have noticed the people 5-10 younger than me, in homes, in neighborhoods where I can’t afford to walk down the street! To anyone reading this, please understand that I am not jealous, please though, if you’ve got a system to get around market fundamentals I’m all ears, please let me in on it. I also prepare taxes, so I have a good idea of what people make.

The only thing that I can think of, in your examples that you mentioned, they must be getting help from the parents on both sides. I’ve driven through the Stanford Ranch area, and I am just amazed at what I see. I see what appears to be mostly retail type work, I understand that some tech is in that area, but the tech companies are always trying to find ways to send the work offshore this includes engineering, programming, accounting, those companies, are not going to pay $40+/hr to warehouse and mail room employees, sorry not going to happen.

You drive down many of the streets in the area I just described, and see the boat, the F-250, the SUV with the big pimp’in wheels, the Harley in the garage…And small children’s toys in the front yard. I thinking, wow, they must have $2000 per month in vehicle payments! Plus the $3500 per month house payment and the property taxes! Where do these people work?

Hang in there maybe we will be neighbors.

cole said...

wait at least another year, this won't turn until 2012

buy worst house in best area

fix up and sit/live in it for 10 years or more

monthly mortgage payment should equal 1/4 monthly pay

or

monthly mortgage plus insurance plus taxes should equal 1/3 monthly pay

20% cash down or get FHA/VA to insure downpayment

Around here buy in foothills (not suburban) or right along the river, or in some historical neighborhood (place with some character)

PeonInChief said...

Usually what happens (I know, that's not necessarily instructive) is that the housing market falls and then sits at the bottom for several years before beginning to rise again. If you're trying to time the market, you want to buy just as prices start to inch up after several years of bouncing at the bottom. If you want to buy a house without necessarily timing the market, wait until prices have stabilized for several months or a year before buying.

But just because something happened before doesn't mean that it will happen that way again. Prices could stabilize and then decline more. Or the government could decide to subsidize higher prices to keep the market from collapsing.

campbeln said...

Neverowned & KTM 300:

I too am looking to buy (a lot in my case, see first comment) and from what I've been seeing in my searches for homes to compare to lot prices (Rocklin, Roseville, Folsom... so nice areas)... things are getting ugly fast! AND we still have 2-3 more waves of REOs comming (mid-late 2008 plus 2009-2011 for the Neg-ARMs depending on who's reset schedule you believe). SacTown is going to get bloody (we're in the second inning, maybe)! I personally am looking at 2001 comps as a general indication of what a "good" deal will look like. If you had perfect timing you'll probably be able get under 2001 comps (again, just my opinion based on my 12-18 months of reading about Sac's RE and the economy).

Do yourself a favor and start reading a few other blogs (if you haven't already). I highly recommend "Calculated Risk" (one of the best features of this site is the comments section - READ THEM on relevant articles, the community is excellent and very helpful). Other's include "Mish" and "Dr Housing Bubble" for housing and "Winter (Economic & Market) Watch", "Sudden Debt" and "MaxedOutMama" for more general economy speak. Take a look at "http://reader.google.com", sign up for a Google account (if you don't already have one) and subscribe to all of the RSS feeds for the blogs mentioned above. That's how I keep on top of this stuff!

Best of luck to all looking to buy in this environment! Just a few more words of advise... get rid of all the debt you can, even if it cuts into the "house fund" a bit. If the economy does what I think it's going to do two things are going to be crucial - low/no debt and *cash* on hand (stocks, money markets, bonds are not cash). The cash that you have, spread around among 2-3 banks and keep it under the FDIC limit (less then $100,000, congrats to those with more then that!). Stay away from Washington Mutual and to a lesser degree Wells Fargo. Smallish local Credit Unions are a better bet oddly enough but even they can be dangerous if they over bet on 1 or more Commercial RE projects (which is the next shoe to drop).

Again, best of luck to all!

Cn

campbeln said...

AgentBubble:

Yea, I hear ya! I've seen too many examples now where I could buy a lot, or a house on a lot about half the size in the same area for the same price. Or my personal favorites: buy a lot, or for $100,000 more get a house on the same sized lot!? Who are they kidding?

The few lots that have sold in my areas/criteria have been "aggressively" priced. A half acre in Rocklin for $160,000-ish Nov/Dec (ML# 70112088, still too high in my opinion) and a 5+ acre lot on Salmon Falls Rd for nearly $50k less then asking (ML# 70095680, I'm bitter on this one, I probably would have jumped on it at that price!).

All that I've read states that at least from a builders point of view the land is the only variable in the equation:

Zoning allows for "X" houses on this lot size at a max of "Y" sqft per home, it costs me "Z" to build each home, I want "W"% profit and comps sell for "V", leaving the value of the land at "U"

So in theory if there is a 10k fall in the value of the comps, that comes directly out of the value of the land ("U" in this case) as it's the only variable. 'Course that isn't playing out just yet! I've seen a couple homes on Par Pl. in Rocklin where the value of the land under the homes (based on $125/sqft turn-key construction) was about $50,000 while the lot literally next door was priced at over $200,000 (ML# 70073772)!?!

I guess I just need to wait out the builders with excess lots (like Medici Way in El Dorado Hills) and/or wait for them to go under and have the bank do REO sales?!

Have you noticed any softening in lot/parcel sales?

Thanks!

Cn

lexi said...

ktm300

I agree about Stanford Ranch. I really think they are all livng on
credit there... or they have printing presses in their 6th bedroom... churning out couterfeit money... personally it reminds
of Stepford Wives where everything
is the same and all the women spend
all their time planning their next
plastic surgery. All the homes look the same... I think people will start moving away from giant
stucco box neighborhoods where
everyone's house looks the same and
start looking for established neighborhoods with some personality.

AgentBubble said...

campbeln said... Have you noticed any softening in lot/parcel sales?

Yeah, I honestly have. We've been looking for 5 acres in the Galt area for about 18 months. When we first started looking, $350K was the standard price for 5 acres. It's down to about $300K or a little lower now. Still way too high though in my opinion.

norcaljeff said...

Neverowned,

Don't feel bad, a lot of us are in the same boat and have the same thoughts. In terms of when to buy wait until you are ready financially then wait 6-12 months after that. Prices and rates will still be lower.
And keep this in mind: What comes around goes around, it all seems to work out in the end.