Monday, February 25, 2008

Sacramento's Faux Economy Unmasked: Bald Tires on Beemers

From the Sacramento Bee:

That economic downturn bug that's going around? Local tire sellers have caught it. "My sales are off 20 percent," said Ahad Parvez, owner of A&A Tires on Watt Avenue in Sacramento. "Business is terrible. This is the worst it's ever been – and I've been selling tires for 20 years."

Local tire retailers are in a jam. Construction firms that used to wear out tires running between jobs during the home building boom haven't been driving as much since the bubble collapsed. Meanwhile, wary consumers are tapping the brakes on spending, especially higher-end tire and wheel purchases that give shop owners the most profit.
...
As the economy has slowed, consumers have found more ways to save on tires. "I'm seeing more tires come in bald than ever," said A&A Tire owner Parvez. "Scary." Cunnington said that he also has seen a jump in the number of unsafe tires that roll into his shop, sometimes on expensive cars like Mercedes or BMWs.
From the Sacramento Bee:
As the spring real estate season begins, all the normal market rules have changed, frustrating not only sellers but also a smaller crowd of real estate agents. The 24,944 agents and brokers working now in Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and Yuba counties today are 1,240 fewer than the same time last year, says the state. The Sacramento Association of Realtors says its membership has dropped by 12.6 percent over the past year. In Placer County, the Realtors association is down 7 percent from a year ago and 16 percent off its September 2005 high.
...
"The level of frustration in the real estate profession is as high as I've ever seen it," said Howell Ellerman, a business and real estate professor at Folsom Lake College.
From the Sacramento Bee:
The big white bus rolled up to a dozen empty houses in Elk Grove, where last year something went badly wrong for those who lived inside them. Saturday, their swimming pools were green, the electricity off and pieces of a child's puzzle lay scattered across one upstairs hallway. The houses were the main attractions of a new phenomenon to rock this housing market: the foreclosure bus tour.
...
"Oh, so that's what's going on," said a surprised Dena Ruiz in her 1990s neighborhood. "We've been here six years and we make our (mortgage) payments." She pointed toward several houses on the street in financial distress and lamented the collective effect on her home's value. "Our house was worth $450,000 2 1/2 years ago, and now it's worth $340,000, if not $240,000," she said. "They just keep dipping."
...
[Lori] Mode, who plans another foreclosure bus tour March 29 in Elk Grove, said she was sorry there weren't more first-time buyers on the $20 tour. She said, "They don't know what they're missing in this market."
From the Sacramento Business Journal:
Kimball Hill, the Sacramento region's 24th-largest builder last year, might be one of the most honest about its financial position, but it is likely not the only one with serious doubts about viability. Looking at the Greater Sacramento market, there simply isn't enough business to go around. New-home sales fell to 7,500 last year, less than half of what they were in the boom in 2004, despite plummeting prices.

With thousands of foreclosures, the median price for resale homes dropped 23 percent in a matter of 10 months to $285,000 as of December, according to the California Association of Realtors. [Make that down 29% in 10 months as of January.] And brokers are predicting that land will be sold at pennies on the dollar as some firms struggle to stay afloat.
From the Sacramento Bee:
Sacramento County's financial officials got a huge shock last month. Their monthly interest payment on a single bond increased by more than $500,000. The hit is fallout from continuing turmoil in the nation's credit markets and specifically nervousness affecting a class of variable-rate bonds called auction-rate securities...The rising bond costs here show just how widespread the ripples are from a crisis tied partly to the collapse of the housing market.
From the Stockton Record:
When did it all change for the housing market? I've had plenty of discussions in and out of the office about the timing of events that led to the decline that caused Stockton to become the nation's foreclosure capital.
...
Just like the stock market, fear and greed have driven the housing market. It's fear you'd be priced out of the housing market forever without doing something. It's the greed of those making big money through commissions or fees.
From Bloomberg (hat tip New Jersey Real Estate Report):
With no bottom in sight for the U.S. housing market, buyers are in game-show mode. There are plenty of deals out there, yet you have to make some decisions if you are buying a new home. Choices flash in front of you as if a host is badgering you to decide your next move. Do you wait for prices to fall further? Or do you buy now and take the builder's incentives or their financing?
...
Whether you are looking in Florida, Southern California, Las Vegas, Phoenix or Ohio, one variable continues to taint several areas. Until the government can stem the number of foreclosed properties due to come on the market -- an estimated 2 million -- it's a good time to hold off.

Prices are going to fall a lot more than Freddie Mac's forecast 12 percent in the most overpriced areas, which may experience 50 percent declines or more. Patience is a virtue in this market. It will also net you a better deal if you can turn off your game-show impulses.

30 comments:

Tyrone said...

All this negative news and the damn market is up, today.

Here is one headline:
Stocks Rise As Ambac Rating Affirmed

And earlier today there was this headline:
Stocks Higher on Hope for Housing Bottom

Yeah, right; everything is Ok. Nothing to worry about.

Cmyst said...

I can't find the article now, but one of the ones I read stated that the stock market was responding favorably to Lawrence Yun from the NAR and his report that there were vast numbers of potential buyers sitting on the fence. It was hilarious.

Diggin Deeper said...
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Diggin Deeper said...
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Diggin Deeper said...

US home foreclosures soar in January

http://news.yahoo.com/s/ap/20080226/ap_on_bi_ge/foreclosure_rates_2

"The loan workout modification programs aren't having a significant material effect on keeping properties from going back to the banks," Sharga said.

Who would've thought different?

Here's the one I'm following...

PPI core up .4% in January....YoY the highest seen since 1981.

Going back to 1981, average mortgage rates in September of that year were 17.98%. Why? Because inflation was running double digit increases yearly at that time.

Watch the 10 year and the 30 year treasury interest rates. They are a much better guage of inflation then what the Fed does from here. Another good guage is the 11th District cost of funds and the Libor.

It's going to be interesting to see just how higher rates affect home prices...While everyone thinks they will plummet, I'm not so sure.

wrong moves said...

Diggin says "It's going to be interesting to see just how higher rates affect home prices...While everyone thinks they will plummet, I'm not so sure."

Diggin', By "they will plummet" do you mean rates or prices. Sorry, I'm a little dense this morning I guess.

I'm thinking you mean if higher rates are in the future, then prices may not fall?

Could you expand on how if rates rise then prices will too? Me, if it costs more for the loan, then that is less I can pay....

Thanks

smf said...

OK, DD, please correct me if wrong:

Sacramento County only, figures derived from US census office.

2000

Population = 1,223,499
Housing units = 474,814

2006

Population = 1,374,724
Housing units = 542,499

Population growth from 2000-2006 = 12.4%

Housing unit growth = 14.3%

Year 2000 housing units X 12.4% = 533,501 units required to meet population demand.

I would say about 8,000 excess housing units built, not including Yolo, El Dorado, and Placer counties.

Diggin Deeper said...

Wrong moves...

This is not a popular answer and is only one person's opinion...

I just don't see the average median priced home in Sacramento falling to the $150's level (or an additional $100K from here). Short of a complete economic collapse, I'm thinking $175-185K but not much more. And by the time prices get to wherever they're going, mortgage rates could rise rapidly enough to oustrip the mortgage payments one could make while rates remain at current levels.

People will tend to put way too much faith in housing price declines and just assume that low rates will be there to support them when they get ready to buy. I'm not so sure. I would think that a fixed mortgage payment during inflationary times would be a priority, but that's only because I've been through it before. There are those on this blog who experienced the late 70's and early 80's when rates exploded upward. They'll remember the wraparound loans, interest only seconds with balloons, and other creative financing used to combat high rates. ARM's were based on Libor and the 11 district cost of funds and many were tagged with higher payments as rates reset over the period. Those were different times but historical and a good reference point, nonetheless.

Kip said...

cmyst,
Though I didn't read the article you are talking about, I don't see what's hilarious. The stock market usually jumps, for a moment, on good news.
sounds like they were talking about the principle of 'pent up demand'. The idea is that the stream of eligible home buyers does not necessarily stop due to a housing market crash. Many people are still in a position to buy a house, they are just waiting until the market corrects itself first. That pool of potential buyers will continue to grow until they perceive the market to be safe again.

smf said...

"People will tend to put way too much faith in housing price declines and just assume that low rates will be there to support them when they get ready to buy. I'm not so sure."

I don't think so either. But I'd rather have a higher interest rate, with a hope of a future lower rate, than a high home price.

Diggin Deeper said...

smf...great work!

That's a little over 1.4% excess which doesn't seem like all that much. I sure would like Gwyn's take on this because foreclosures will factor into the excess realizing that displaced families will have to live somewhere.

siflsockpuppet said...

diggin_deeper,

I've heard people talk about higher rates making the net housing price the same even with a lower purchase price. Three things jump to mind:

1. More interest = more tax deduction, giving a slight advantage at the same monthly payment.
2. Ability to refi at some undetermined point, getting better rate with a lower balance = lower payments.
3. Prepayment of principal will result in greater payment drop (for ARM) or quicker payoff (for fixed rate)

Diggin Deeper said...

"with a hope of a future lower rate, than a high home price."

If you'd bought a home back in '78you would have waited over 20 years to get what you'd hoped for. That's probably not a time frame most would accept

siflsockpuppet said...

"If you'd bought a home back in '78you would have waited over 20 years to get what you'd hoped for. That's probably not a time frame most would accept"

Though rates may have taken 20 years to fall that far, they were much lower many, many years sooner than that. Maybe not as low as the person who paid more a year or two earlier, but my payment would shrink and my principal balance would still be lower.

My payment started the same (less P, more I), it's now less than the person who bought a couple of years earlier.

smf said...

"If you'd bought a home back in '78you would have waited over 20 years to get what you'd hoped for."

But you would get a great home price! :)

Diggin Deeper said...

siflsock...

All good points but if we are moving into a high inflationary environment, we're not addressing it yet. If we're at the beginning, then rates will continue to move higher until inflation abates...that could take the better part of a decade before you'd get the opportunity to reshuffle your note, all-in costs considered.

And remember, home ownership and family budgeting costs will be rising as well. If they weren't we wouldn't have deal with higher rates

Just look at what's taken place over the last couple months with Fed funds rates. They've dropped to a point where we ought to be able to borrow at 5-5.25% as we were able to do when they got this low before. 30 yr rates are over 6% today which is about 15-20% higher than they should be. Why?

It's kind of "bird in the hand" thinking here. I'm not suggesting we're at a low point with regard to pricing, just that there'll be a short window of opportunity where risk (all things considered) will favor rates over further declines. I don't know where that is but I'm not about to overlook one to get to the other.

siflsockpuppet said...

diggin,

I completely agree, and as my year lease is up on May 1st, I'm beginning to look at houses again and just sent an e-mail to a lender I contacted in mid-January. I am in it for the long haul and am not worried about a few hiccups in home prices in the short run.

Diggin Deeper said...

smf...my point exactly. If you overpay by 10-15% to secure your mortgage payment at the lowest payment possible, you don't care what happens when rates rise... you're golden and locked in. And you're able to withstand cost creep because the biggest part of your family budget is firm and fixed.

Smf you already own a home, probably at a low mortgage rate. You've got nothing to worry about. But what about those that want to buy at some point? If you don't consider all factors that come into play, you might just lose out waiting for the last shoe to drop.

How many on this blog have ever experienced a high inflation period of time in this country? How many have bought and sold homes during those periods?

The only point here is that the same greed and emotion that drove the market up will factor into the decision of why and when it's time to buy as we're moving lower.

smf said...

OK, look at it this way:

If you purchase get a mortgage for $300K, it will take you (normal 30 year loan) about 10 years to get the principal down to about $250K. Calculate this by using an amortization table.

So, if the value of the house goes down another 20% tops, it makes the $300K house a $250K house.

And knowing that the bottom tends to be sticky, figuring out that the excess housing I calculated is only to 2006 (top of MLS was 18,000 for sale, about 8000 excess in Sacramento County alone)...

Yeah, I'll try to wait, unless we find a house that we can live for a loooong time in.

Diggin Deeper said...

"If you purchase get a mortgage for $300K, it will take you (normal 30 year loan) about 10 years to get the principal down to about $250K."

If rates move up 3 points during the time it takes to fall an additional 20%, you're under water in your analysis. Don't think it's possible? Consider that during a 14 month period starting July 1980 to September 1981 30 year mortgage rates rose over 6 points to try and cool inflation. They started at 12% and rose to 17.98%

Consider that historical rates are just over 8% during a 50+ year period. That 8% average falls in fairly stable and normal inflation periods.

Rates are at 6% today with inflation threatening. I'm not suggesting a 6 point rise but 3 points could easily be factored in over a 12 month period. Should that occur, you'd be pleased that you didn't try to time any bottoms, you will have bought a home under low fixed terms, and you'd be much better off riding out whatever cost creep was coming your way.

Gwynster said...

I finally just made a blog entry out of my old data post

http://tinyurl.com/3d76y9

I'll do this with more of my data comments as I find them. I'm swamped at work and I just don't have the time to go over the numbers for people who are just catching on to this again, and again, and again...

Gwynster said...

DD, I'm looking at houses that we could afford on 1 income using a 15 yr only because that's the kind of faith I have in the economy as the boomer exodus begins.

If rates go down later, we refi or just pay the bloody thing off. I'd rather bank on a refi later before I'd hope for gift from the purchase price reduction fairy >; )

And to all who are confident on jumping now - knock yourselves out baby! You go first **winks**

Jacob said...

There are a lot of things to consider. If you save money by renting while prices decline, that will reduce the loan amount you will need. As interest rates rise, that will effect your payment so you need to find a balance.

If you plan on staying put for a while and your job is relatively safe then it may be a good time to buy, otherwise I think it is good to save and stay mobile and just wait and see what happens for the rest of this year.

I remember seeing Gwyn's post on population growth, she also had some stats on birth rates. So even if we have x% more people, some are just born so will not be buying homes anytime soon.

mechanico said...

If interest rates go up prices will come down even further.
But in times of high inflation it may be best to take on that debt early.
You got it Gwyn. 1 income.

As far as the bottom. I'm expecting a lot of products to come out soon to stop these forclosures, both gov and private.

The refi for current value/ issue warrant for the rest plan is gaining momentum.

If the forclosures stop prices will flatten.

Diggin Deeper said...

Gwyn...that Boomer out migration is one consideration I hadn't figured on...but it makes sense...looks like you've got what I call a "shallow water" plan...you're not going drown no matter what comes along.

As far as buying right now? Maybe a little too early...but my eyes open and I'm beginning to like what I see.

Patient Renter said...

"I'd rather bank on a refi later before I'd hope for gift from the purchase price reduction fairy >; )"

My thoughts exactly. If you pull the trigger too soon and the floor continues to drop out from under the market, you're toast. But if you wait for bottom and buy, regardless of rates, you're not necessarily toast so long as a refi is an option.

"As far as the bottom. I'm expecting a lot of products to come out soon to stop these forclosures, both gov and private."

Forclosures can't be stopped without violating private contracts between buyers and sellers. As wreckless as the govt. is, I doubt they'd go that far.

"If the forclosures stop prices will flatten."

Not necessarily. What triggered price declines in the first place well before the forclosure mess even started? Buyer sentiment.

Diggin Deeper said...

We're now moving into the selling season. Buyer activity, if there is any, should start showing up in March.

It will be interesting to see if "pent up" demand that Yun is barking about ever materializes.

smf said...

"As far as the bottom. I'm expecting a lot of products to come out soon to stop these forclosures, both gov and private."

There's very little than can be done for those in foreclosure. What happens to those who own multiple properties? What happens to those who don't make enough to pay for their adjusted payment? And what happens to those who see a similar home at 50% off their loan value?

The genie was let out long ago, and cannot be put back in.

"If rates move up 3 points during the time it takes to fall an additional 20%, you're under water in your analysis. Don't think it's possible?"

You'd be correct. What becomes cloudy is whether interest rates will go up as high. It is a possibility.

"It will be interesting to see if "pent up" demand that Yun is barking about ever materializes."

If they are banking on the speculative demand going back up to where it was I'll say 'NO'.

mechanico said...

If those facing foreclosure are offered the chance to refi with the loan based on current market values, with the difference packaged as a warrant to be paid off later, I think they'll jump.

The banks have the choice of foreclosing and trying to sell these homes in a dead market ,losing even more money, or offering these types of loans.

FB's are better off walking away but I doubt they will.

If the banks don't offer these loans I think the government will.

Furthermore I'm expecting more foreclosure moratoriums. Gov mandated or voluntary. Banks would rather let people stay in their homes than foreclose and add to the inventory with this many properties on the books.

Patient Renter said...

"If those facing foreclosure are offered the chance to refi with the loan based on current market values, with the difference packaged as a warrant to be paid off later, I think they'll jump."

Maybe some suckers would, but certainly many others would walk, as we've seen people "walking" in droves lately.