Sunday, January 06, 2008

"Prices Are Still Too High for Potential Buyers" v. Consumer "Mental Disorder"

From the Sacramento Bee:

Dean Wehrli, vice president of the Sullivan Group Real Estate Advisors in Elk Grove: Foreclosures soar; buyers wait; credit tightens. The picture for Sacramento's residential market in 2008 doesn't look good...[P]rices are still too high for potential buyers. Consequently, prices will continue to regress in the second half of this decade to the place they should have been had we not been so frenzied in the first place. If we are waiting for equilibrium – when buyers hold as much "power" as sellers – then we will still be waiting by the end of 2008.
David Lyons, labor market consultant at the state Employment Development Department: The economic slowdown will translate into a weak labor market in the Sacramento region, with overall job losses outweighing those sectors still hiring. The regional economy is in for a very slow start to the year. The region generated a net gain in jobs in 2007, but the growth rate slowed to a crawl by year's end. As of November, the region had added just 6,600 net jobs in the past 12 months – a gain of 0.7 percent. It marked the first time the annual growth rate was below 1 percent since 1993. And 2008 is looking bleaker. It's very likely we're going to be in negative territory.
Dan Lankford, managing director of Wavepoint Ventures, an early stage investment company with offices in El Dorado Hills and Menlo Park: Most economists agree that the U.S. economy will slow in 2008. The Sacramento region will likely feel a more pronounced tapering off, given the boom of the last several years and the large role that real estate plays in the local economy.
From the Sacramento Business Journal:
Dean Wherli, a vice president with real estate adviser The Sullivan Group, offered a scenario last month during a presentation at an Urban Land Institute event that said if new-home prices around the region had appreciated at a more moderate rate -- say 6 percent instead of the fast-rising prices between 2000 and 2005 -- the price for a newly constructed home at the end of 2007 should have been about $319,000. Instead, the current median price is $385,990. The higher price means that, despite the deep discounts by new-home builders, the region's overall prices are still about 17 percent more than they should have been under the moderate-growth scenario. Wherli said if prices were to hold throughout 2008, by the end of the year they'd still be about 12 percent above the moderate-growth scenario.

Prices, however, seem unlikely to hold. Discounts are drawing a trickle of new buyers, so homebuilders are likely to continue to offer price reductions to lure more buyers.
From the Real Estate News blog:
Our local real estate market has already corrected itself from its past excesses. The median selling price for a county home is $100,000 less than two years ago...Since we all understand the financially successful concept of buying low and selling high, why is it that buyers aren’t?

Consumers are suffering from a mental disorder called media-itice. The affliction resulting from four years of being propagandized by the major media and the economic press about the collapse of the real estate, mortgage and credit markets. Beginning in 2003, consumers have been told that the real estate market was: popping, sinking, bursting, plunging, free-falling, imploding, exploding, collapsing and in total meltdown....Is it any wonder that potential homebuyers are put off from buying a home? Yes, there are some problems but isn’t all the hoopla over a small percentage of troubled homeowners a little too much?

Legislative changes in the mortgage, appraisal and credit industries, insuring market exuberance won’t happen again, will not change consumer immediate attitude toward real estate as a long-term investment and it will do nothing to perk up the county’s housing market. What our current local market needs is a stimulus that will attract homebuyers to El Dorado County.
From the Sacramento Business Journal:
The state's estimated $14.5 billion shortfall could hit Sacramento disproportionately hard if jobs around the Capitol are trimmed. Sacramento's loss of 7,200 construction jobs during the past year was mitigated by 6,000 new hires in government. Given the decline in sales-tax revenue and building fees that have hit all cities and counties, the region can't rely on government for economic growth this year.
Sacramento's core jobs are in financial services, construction and government, and none of them look especially strong in the coming year. Housing looks the weakest, with experts predicting further erosion in prices and even fewer sales than the estimated 7,500 new homes built and sold in 2007, down more than 50 percent from the peak years. Sales of existing homes aren't expected to recover this year either, with more foreclosures likely as another wave of adjustable-rate mortgages resets to higher rates. More than 14,000 existing homes were for sale in November 2007, 18 percent higher than a year ago, though down from the record high of 15,302 in September.
From the Sacramento Business Journal:
Sacramento's reliance on government, service, construction and financial service industries for growth in the office market could make for a lean year. With the construction industry taking a huge hit, there has been a ripple into the office market that those in the industry are hoping doesn't build into a wave. That means lease rates are stabilizing and concessions are rising. The region's office vacancy rate inched higher in the third quarter to 15.2 percent for nongovernment buildings larger than 5,000 square feet.
From the Sacramento Business Journal:
A stakeholder in Sacramento's Reynen & Bardis Communities Inc. has accused the builder of making just two monthly payments before defaulting on $19.8 million in obligations it took on this summer. The lawsuit brings the company among the ranks of other local builders struggling through the housing slump who have faced defaults and ended up in court as the market turns against them.


smf said...

Our local real estate market has already corrected itself from its past excesses. The median selling price for a county home is $100,000 less than two years ago...Since we all understand the financially successful concept of buying low and selling high, why is it that buyers aren’t?

Because, you idiot, prices are still way too high to be affordable to most people. And if people get 'priced out' of the market, you lose your job as well.

Should I give a few more examples?


Just read your prior bubble history. This is not guessing. This is how real life happens.

Imagine if I had this conversation:

I paid $700 for this beanie baby, now I am trying to sell it for $400 and people are not buying!! Why not!!??

Or better:

I bought my Yahoo stock in March 2000 for $90, now I am trying to sell it for $60 and I get no bites, why not??!! (Currently traiding at $24)

What is the lesson?

It doesn't matter how far the prices have dropped if it still not supported by fundamentals.

capitalME said...

I don't really get the feeling that my wife and I are "waiting." I feel more like all these broke-a** realtors are doing the waiting.

SacramentoCrash said...

Elk Grove sinking in more than one way

Does that mean that the Develop-Whores were able to sell Elk Grove homes without regard to soil conditions "unique to Elk Grove"

Why didn't the Elk Grove Building Department (and their county predecessors) insist on locale specific construction standards for soil compaction prior to allowing 20,000 to 30,000 stucco boxes to be built?

Can't sue a bankrupt / non existent development entity. Alot of those greedy Develop-whores hid behind a series of limited partnerships.

Thursday, October 11, 2007
Elk Grove adopts new building standards, services
Sacramento Business Journal

The Elk Grove City Council on Wednesday night approved new guidelines designed to improve services for the construction and development community.

The engineering design standards and construction specifications will clarify and streamline the engineering design process, and improve quality standards for public improvements and amenities, the city said in a news release.

Changes include:

* On-line access to standards and specifications.
* Information for design and construction condensed from several source documents into a more concise form.
* Documents can now be amended as needed by the director of Public Works to take advantage of improvements in available technology and/or products.
* Construction standards that take into account the soil conditions unique to Elk Grove
, and require roadway sections that will have a longer useful life with less long-term maintenance.

The changes have the support of the Building Industry Association.

>>> The fact that the changes are supported by the development industry sounds like another case of the City being in the grasp of the developers.

SacramentoCrash said...

Another example of "Pocket Pool" or "i'll marry my cousin if it means the deal will get done":

A stakeholder in Sacramento's Reynen & Bardis Communities Inc. has accused the builder of making just two monthly payments before defaulting on $19.8 million in obligations it took on this summer.

The lawsuit brings the company among the ranks of other local builders struggling through the housing slump who have faced defaults and ended up in court as the market turns against them.

The stakeholder in this case is William Niemi, a former president of Dunmore Homes.

Diggin Deeper said...

Buyer perception is the heart of any market be they stocks, tulips, or tupperware. The media drives the public in the direction that sells or they become irrelevent and over time non-existent.

This bubble was created by artificially juiced fundamentals that baited the public into believing there was a concrete foundation to spring from. The higher it rocked, the more skewed the fundamentals became, until it lacked complete credibility and affordability for 70-80% of the buying public. Buyer's reacted as if Starbuck's started selling coffee at $10 a cup. They shut it down. And its not going to reopen until there's one buyer for every one seller. That doesn't look too promising in the near future, based on true fundamentals the market faces today.

So all we can do is wait until buyer's dictate they're willing to start buying again. It's still too tough to try and figure out when that will be, but we can be assured that price will be the key to its recovery.

Perfect Storm said...

The picture for Sacramento's residential market in 2008 doesn't look good...[P]rices are still too high for potential buyers. Consequently, prices will continue to regress in the second half of this decade.

This statement will mark the beginning of the bad time for realtors.

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

Jacob said...

I think there was a lot more media-itis on the way up... Nobody cared then. Too busy counting the $$.

Chuck Ponzi said...

I'm tired of this kind of rewriting of history. Does anyone ever remember reading something saying it was "popping", or "bursting" or anything like it back in 2003?

I distinctly remember in 2004 and 2005 when I started the Socal Bubble blog saying that it was GOING to pop or burst, but never came across someone who had previously said it was already doing so. This writer is as a bad of a writer as they can be. Fighting phantasms with conjecture, those things never happened except in that person's own mind.

However NOW it is popping. Duh.

Has this person smoked too much weed to understand the concept of time?

It's simple: It was predicted, it happened. Those who predicted it are now predicting that it's going to get worse. You can aggrandize yourself on how smart you still are, but you never saw it coming in the first place, what makes you think you can predict the future now? Do you really want to tempt fate a second time and not prepare for it to get worse?

Like I say: Stupid is doing the same thing and expecting a different result.

Patient Renter said...

Love the mental disorder comment. My mental disorder is in an account, and growing monthly. How's that house working out for ya? Yeah, that's what I thought.

mold city said...

Sounds like you guys have a housing market problem. You should get some of that special fancy real estate that never goes down in value like we've got in Vancouver. We pay 73% of the average PRE-TAX income for the average house and we couldn't be more pleased with our rock-solid investment.

norcaljeff said...

You're right Chuck, I thought the same thing. Either they meant to write 2006, or this is an outright lie. No one, and I mean no one was talking bubble in 2003. People were too busy acquiring 2-3 investment flips to be seeing a bubble.

Tyrone said...

The median selling price for a county home is $100,000 less than two years ago...Since we all understand the financially successful concept of buying low and selling high, why is it that buyers aren’t?

Uhhh... ok... Prices are down the magical $100K; we can all start buying now. *wink-wink*

Being a broker, you think that this guy would have some idea how a cash-flow analysis works. Guess not.

Tyrone said...

I just read Ken's resume. Here are some of his responsibilities...

Responsibilities: Strategic planning, financial development, site selection, programs development and inter-phasing with real estate brokers.

What did he do with those brokers? Is that legal? LOL

anon1137 said...

I saw two RE brokers inter-phasing in the backseat of a Lexus the other day.

capitalME said...

At one point, years ago, someone had compiled a really nice list of Los Angeles/Orange County headlines about the late-80s/early-90s boom/bust. It was fascinating to follow the media's tone UP and then DOWN. Does anyone have a list of headlines in the Sacramento region from before the bust? I saw the articles and I know they existed. It irks me that dipsh*ts like this guy pretend the press didn't follow the boom in both directions. He must have been really sad when Yahoo!, in big bright letters at the top of the most trafficked page on the entire Internet, compared the current housing bust to that of the Great Depression. Tit for tat, I guess. Remember, it was only one short year ago that Yahoo! ran a featured piece (on what was still the most trafficked page on the Internet) by real estate expert and The Apprentice star Kendra Todd. Oh, here it is. Prepare to laugh really, really, hard.

Cow_tipping said...

From the Real Estate News blog:
Our local real estate market has already corrected itself from its past excesses. The median selling price for a county home is $100,000 less than two years ago...Since we all understand the financially successful concept of buying low and selling high, why is it that buyers aren’t?

Isn't this clown a genius.
Here it is dumbass ...
Prices are still waaaaaayyyyy tttttoooooooo Hiiiiiiiiiiggggggggghhhhhhh ...
You probably want the buyer to catch your falling knife ... so you can unload and get out. I empathise, I have my own knife to unload, but, that aint gonna happen, you wanna drop under the market price if you want to sell. And 100,000 may sound like biiiiiig number, but there are houses that are 50% off from their last sale price in 2006. They are not selling yet. You want to find the price at which it will sell, drop in large 10% increments every 3-4 weeks and maybe you can locate the bottom.
Prices have run up over 200% in cases, your 100K may be a drop in the bucket.
And no, the "real estate market perking up" isn't universally desirable.

Diggin Deeper said...

When you take these factors into consideration, there's probably no way that Sacrament real estate CAN find a bottom this year:

1. The continued buildout by new home contrators keeps adding more and more inventory. Present inventory levels can't find equilibrium until future sales consume what's already available, driving it down to historical levels.

2. We haven't seen the last of the foreclosure explosion. Subprime lending is virtually dead and has taken more than 20% of the buying public out of the picture.

3. Credit is still hard to get and almost impossible to get over the FHA max.

4. The state's in trouble which could easily translate into job losses and at least an area wide recession. The bottom is falling out on the construction industry that's propped up the area over the last 5 years.

5. Inflation is growing and eating away disposable income. Any stimulus to drive rates down will likely fuel an even greater rate of inflation making affordability "less affordable".

6. Median incomes will not support the pricing multiples attached to the median priced home. Pure and simple, people either will not or cannot buy at these multiples.

7. Public perception now places the economy at the top of the list as far what we worry about most. If you worry about your job, you're not likely to buy a home.

8. Consumer spending is showing signs of weakness. Credit card defaults are rising rapidly. Auto sales from the majors are projecting a weak '08 which will likely translate into job losses and plant closures. Bankruptcies pushing toward all time highes.

There are others, but imo, Sacramento is naked without a diverse local economy that's capable of taking shock waves when the economy goes negative.

We need new industries that pay better than average wages in order to consume our overpriced inventory. High (well paid) numbers are needed. Without them I'm wondering if there is a bottom?

Gwynster said...


That a really good point. With so much downward movement within the local economy, there is no way to stabalize this year. Just your list alone will take 18 mos minimum to play out. That puts us at mid 2009 for a bottom if we're lucky. I'll stretch my neck out and say Nov. 2010 at the earliest.

Cmyst said...

I've been complaining that I used to save about $500 a month and I haven't been able to this year. Well, DO'H!
Turns out I made about 8k less this year, which means about 4k less in my pocket and with inflationary gas,food and energy prices that's where the money went. Why did I make 8K less? 'Cause I didn't work near the OT that I had the year before, nor is it likely that I will pick up that lost OT this year. And MY job is in a relatively stable field!
Multiply that one out a few hundred thousand, and you get what is happening to retail sales, auto sales, etc. Housing has to come down to meet our income, and it won't go up again until incomes begin to rise -- not fall.

Jacob said...

Auto sales follow housing so no surprise that they will be hurting. If you cant afford you mortgage you really dont need that new SUV.

Although you would like to buy it if the bank would just heloc you the money, but that ship has sailed.

So what comes after Auto sales? General retain?

Probably stores that sell TVs and other high end items that you want but dont need.

Starbux is hurting.

And if you think things might turn around then we will get hit with massive layoffs.

And a couple years down the road all the boomers start to retire and will want to sell their homes and move out of state.

So my plan is save save save.

Diggin Deeper said...

Merrill Lynch Economist Says US Has Entered Recession

The rest of the financials are balking and waiting for confirmation while Merrill comes right out and puts it on the table.

Bush and the rest of the crew are preparing economic stimulus packages to spur the economy back into a growth mode.;_ylt=Aghy5ntRZa72pccSm0mIBci573QA

Pimco's Bill Gross is predicting the Fed will aggressively lower interest rates during the first half of '08 and reach a 3% Fed Funds rate by summer.

I've been saying this for a couple of months now...We are already in recession and that won't play well locally. This one is a far cry from low growth low inflation recession we last had. This time we get to deal with the true cost of compounded inflation that's been smouldering and accumulating over the last 3-4 years. You can play with the PPI and CPI just so long before the true impact of price increases filter through to the public.

Gwynster said...

And yet we get glue huffers like this: MLS #: 70123499

We're now only looking at vintage homes in Woodland or Downtown/Midtown. Mr. Gwynster refuses to own anything with a slab foundation.

Diggin Deeper said...

...A real eye opener!

Some exerpts from today's Daily Reckoning...

“Since 2001 the dollar price of oil and gold have run in almost perfect tandem,” writes Chris Lowe. “The gold price has risen 239% since 2001, while the oil price has risen 267%. This means that if the dollar had remained ‘as good as gold’ since 2001, oil today would be selling at about $30 a barrel, not $99. Gold has traditionally been a rough proxy for the price level, so the decline of the dollar against gold and oil suggests a U.S. monetary policy that is supplying too many dollars.”

So there you are, dear reader. In terms of real money – gold – oil is still cheap. Then again, in terms of real oil, gold is cheap . In terms of anything real, everything else is realistic. In terms of gold, the ordinary American house is cheaper today than it was five years ago. In terms of oil, the average stock is barely half what it was five years ago. In terms of soybeans, even health insurance is a bargain.

What to make of it?

In terms of oil or gold, other commodities begin to look reasonable too. In fact, everything begins to look reasonable...even the euro. The European money has gone from a low of 88 cents to a high of nearly $1.50. Is the euro so great...or the dollar so awful? In terms of euros, American houses are about the same prices they were 10 years ago. Yes, there is a foul odor coming from the financial barrel. But it is the dollar that stinks. "

"But many people are getting the wrong signals. They’re mistaking inflation gains for real gains...and they’re making errors. That’s what happened to the homebuilders, who thought that higher nominal prices meant that there was more real demand. Finally, they realized that the higher prices were largely an illusion. In the first place, they represented no real increase in demand...and in the second place; nominal prices went so high that people couldn’t afford to pay them. Result: falling sales."

"Meanwhile, a sad note: gold, oil and wheat may be at record prices...but salaries have barely gone up at all. In other words, in terms of dollars, the average American is earning a bit more than he did five years ago. But in terms of gold, oil and wheat...his earnings have been cut in half – or worse. That is the great glory of the financial markets. No matter what people matter what officials do...the markets always do what they have to do."

sacramentia said...

diggin deeper - thanks for posting that - very interesting.