Tuesday, February 05, 2008

"The Wrong House at the Wrong Time"

From the Sacramento Bee:

Sukhwinder "Suki" Kaur bought the wrong house at the wrong time. Within months of her July closing on the two-story home in Elk Grove, work in the new subdivision stopped and the builder's parent company, Dunmore Homes, filed for bankruptcy protection. Kaur, who is paying on a $430,000 mortgage, has become the target of two lawsuits and 28 liens from unpaid subcontractors and suppliers. More than a dozen other individuals in the Monterey Village development are in similar predicaments.
...
At one end of Kaur's street are the visible signs of the owners' distress. Rows of utility lines are capped and waiting for homes across a sea of mossy dirt. Nearby, temporary poles mark one subdivision entrance where a gate was never installed. In the distance, a cluster of unfinished homes are sore reminders of the unfolding tragedy. Many of the 50 or so homes completed are vacant.
...
Rebecca Westmore, senior staff counsel for the state Department of Insurance, said contractor liens could become more common as the home market slides. If builders are closing up their shop and not paying, "that's the natural fallout of this market," she said.
From the Wall Street Journal:
The six cities showing the greatest deterioration in home prices are Sacramento, Las Vegas, San Diego, Tampa, Los Angeles and Miami, according to Radar Logic, a New York-based research and analytics firm. All these locales showed double-digit declines in November from November 2006. The report, which looks at prices in 25 metropolitan statistical areas across the U.S., showed that the price per square foot for homes fell 18.6% in Sacramento to $185.98....
November was the fifth consecutive month that Sacramento has claimed the bottom spot on Radar Logic's list. To read the report, click here [pdf].

The Radar Logic stats are a bit stale. Do more recent stats show any improvement in Sacramento home prices? No, says the Altos Research blog.

From CBS 13 (video):
[T]hree zip codes in the Natomas area are being hit the hardest. Homes there typically sell for well over $250,000. But in the past year, some have seen a 50% depreciation.
From the Stockton Record:
The city of Tracy is headed toward a $6 million deficit by the end of this budget year, as the downturn in the housing market finally takes its toll on the city's property tax revenues, Tracy Finance Director Zane Johnston said.
From the New York Sun:
Mr. Clinton stopped in Sacramento at lunchtime, where he was greeted by a crowd of about 1000, according to the Associated Pres. In the afternoon, he was in Stockton, Calif., where several thousand people attended a hastily arranged rally at the University of the Pacific. He honed in on the subprime mortgage crisis, which is severe in cities like Stockton. Mr. Clinton said his wife's plan to keep people in their homes is "much more aggressive than any of the other candidates" and would stave off what he warned would be a "calamitous collapse" of the housing market.
From Reuters:
In Stockton, where single-family neighborhoods are tied together by expressways lined with small and mid-sized shopping malls, many mortgages are in defaults or foreclosure. "I go to the gym and hear a lot of horror stories," Gonzalez said. "A lot of people bought houses a year, year-and-a-half ago and paid top dollar and now can't make the payments."
...
But many who bought during Stockton's housing boom simply ignored loan terms, said Bill Herrin, an economist with the University of the Pacific: "Everybody wanted to do it now, today ... Collectively, we went a little nuts out here."
From the Stockton Record:
The CBS news magazine "60 Minutes" put Stockton on the national map last Sunday in the program's lead story about the foreclosure crisis, "House of Cards." Ground zero, reporter Steve Croft called us, and ground zero we are.
...
Croft's report, mercifully, did not paint the city as unique in this meltdown. Neither did he suggest that what's going on is the result of a concentration of nincompoops in residence (although there was one family interviewed ready to walk away from a mortgage they could afford simply because they were disgusted their home had dropped in value).

One of the many things not guaranteed in life is that your home, or anything else, will appreciate in value. Had appreciation continued unabated - something that carries its own dangers - it would have covered up all the ills being visited on us by the subprime mortgage meltdown. Stockton would not be ground zero in this one and Steve Croft would have busied himself reporting on something else, like reporting that no one, outside a few millionaires, could ever buy a house here because prices had gotten so astronomical. You know, sort of like they were two years ago.
...
The fact is this isn't over, not by a long shot. A lot more loans are going to reset to much higher rates, a lot more families are going to lose their homes, a lot more neighborhoods are going to be hurt and a lot more equity is going to be lost by homeowners who are making their payments.

42 comments:

Patient Renter said...

"Mr. Clinton said his wife's plan to keep people in their homes is 'much more aggressive than any of the other candidates'"

Translation:

My wife's plan to steal money from wise taxpayers who avoided this mess, and give it to the greedy and/or foolish chumps who perpetuated this mess, is more outrageous than all the other plans.

"and would stave off what he warned would be a 'calamitous collapse' of the housing market."

Too late. Maybe your wife should have payed attention 3 or 4 years ago.

Patient Renter said...

It just occured to me that I should run for President (as an independant)!!!

Not only do I, patient renter, have a proven record for spotting disasterous bubbles BEFORE they collapse, but I know a bunch of similar people who would make up a good cabinet. (You guys in?)

I also promise that if I don't spot a crisis headed our way, I won't make the pain worse by burdening taxpayers with my mistake.

Something tells me I don't have a chance though. Voters tend to go for people who fail to recognize disasters before they happen. Oh well.

Bakersfield Bubble said...

"But in the past year, some have seen a 50% depreciation"


Where is Perfect Storm, I think he may have been too conservative?? :)

watchingthebubble said...

This whole lien debacle can't help but hurt the Laguna Ridge/Madeira development on Elk Grove Boulevard. I don't think they've sold more than 200 homes out there, and they've laid out streets, street lights, etc. for thousands of homes there, I believe.

I feel sorry for these Monterey Village folks, not because they made a poor purchase decision, but because I'm sure they thought their title insurance would protect them no matter what. I will never buy a home in a new development that isn't built out or close to being built out.

HOUSE2008 said...

I will never buy a home in a new development that isn't built out or close to being built out.

So very true. I'd usually wait for the last phase or even the models themselves to go on sale before I would consider buying. Besides, what's the rush? They wont build any more homes?

aggiealum said...

"I'd usually wait for the last phase or even the models themselves to go on sale before I would consider buying."

house2008, for most families, they probably buy 1 or 2 homes in their lifetime. For these families, they went with a name that's been around for awhile. If everyone thought like you did, home builders would not be in business. Dunmore is the sole person to blame in all this, not the buyers (don't get me wrong, I do blame those subprime buyers with subprime incomes). If the state wants the housing problems to "turn" sooner than later, they better do something to restore consumer confidence. Because of this story, I'm sure many first time buyers are not likely to trust homebuilders.

alba said...

It seems a very unfortunate situation for the "subs" and these new homeowners. But watching..., you make a good observation on title insurance. I wonder if the law is clear that liens need to be recorded prior to the sale. If so, and they were recorded, seems like what you pay title INSURANCE for. Otherwise, those poor folks will be the impetus to an addended law, way after going into foreclosure.

PeonInChief said...

First, there's a big debate about whether or not the subcontractors can put liens on the houses after they've been sold, and whether the title insurance should insure for any liens that would have been incurred before the house was purchased.

But blame shouldn't be put on the homeowners here. They had no way of knowing that Dunmore was in trouble. (As I recall, it was a big surprise all 'round.) Their loans, whatever, they may be, have nothing to do with this issue

SacramentoCrash said...

Good point about Madeira / Laguna Ridge.

It could be another DunmoreIstic Debacle.

Embdddsgnr said...

California's housing exploded.
Our rise was oft duly noted.
But the "Bubbleheads" knew,
it's too good to be true.
Now there's nothing but value eroded.

alba said...

agreed, their loan is a completely separate issue. But $430K on Dunmore home in Elk Grove, with 50 homes vacant, several unfinished, more not started...is a unmitigated disaster. Throw on lawsuits and the place should eventually be plowed up like the corn that used to grow there.

Cow_tipping said...

I dont see the problem. She owes 430 K on a POS that is dropping in value like a rock. Now there are subs wanting to take it. I suggest she cite this as the last straw and walk, and if the bank dings her credit, she could hire some lawyers to bash the crap out of them with these "lawsuits". They may be frivolous, but they can be cited as the real reason you are walking.
Cool.
Cow_tipping.

SacramentoCrash said...

Another one bites the dust????

Bold moves carried ______ & ________ _________ 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

SacramentoCrash said...

Don't believe the HOmes Sales Consultants.

They will say things are just "Dun Tastic"!

Diggin Deeper said...

We're getting into the litigation phase of this meltdown. Lot's of money to be made, unfortunately the late buying homeowner won't be the beneficiary.

Title insurance claims are the least of their worries. If this was a fender bender on the highway, you call your insurance company, and they take care of the problem. Should be the same for the homeowner who was given clear title to the property. Any nuance that disputes the policy should be handled outside of the homeowner's concern. We'll see.

As was mentioned, the real problem has to do with the present value of the properties sold. These neighborhoods are nothing like the dreams people thought they were buying... nothing like the sales brochures portrayed. Without significant neighborhood completion what are these homes really worth? Are they even saleable? Who wants to live or buy into a neighborhood where the infrastructure remains half built?

The "search for the guilty" phase of this ugly market is well underway. Unfortunately, those late to this party get to do all the cleanup.

SacramentoCrash said...

Now is the time to start doing your homework.

Prices seem to have slipped back to late 2002 levels so now is the time to start researching properties and market trends.

smf said...

Celebrities now selling their homes at a loss...

http://www.forbes.com/business/2008/02/05/hollywood-economy-housing-biz-media-cz_dp_0206realestate.html

...was the high end not immune?

Patient Renter said...

"Now is the time to start doing your homework."

The Credit Suisse reset chart is all the homework you need.

http://patrick.net/wp/wp-content/resetchart1.jpg

HOUSE2008 said...

If the state wants the housing problems to "turn" sooner than later, they better do something to restore consumer confidence

True again. I believe that the one "bandit" in all this seems to be riding into the sunset "sid" free & the state should go after him. Sid Dunmore should be made to pay for the mess he's left behind in lieu of his $11 mil tax windfall. After all the bills are paid he still manages to take home 6-8 mil.

In the end, I believe it would take combination of county, and state officials (politicians), and lawyers to point out to him that it would be in his "best interest" to settle the leins against the homeowners. Is anyone going after Sid Dunmore in all this? Everybody including banks, title insurance comapanies, county, ect stand to lose more that 3mil in legal fees. This is pathetic. As the above quote pointed out, this has many potential h/o on the sidelines. My heart goes out to the h/o.

Jacob said...

Buyer confidence is only 1 of many problems. But the biggest problem is that many people are broke and have been living it up for the past several years based on home equity "wealth".

People never had the money to spend at the level we have been spending, it was all ficticious.

Reality will set it one way or the other. Unless the government steps in and guarantees you 10% equity cash out per year forever in addition to allowing anyone to buy a home at a cheap price otherwise there will be 0 sales. Then we have to get back to the true market fundamentals.

Diggin Deeper said...

"Now is the time to start doing your homework."

I agree...While this will be counter to what most might believe, we've already seen a 33% reduction in the median asking price since '05 (more in some isolated cases). Imho, the market is bordering on chaos and I'm inclined to believe we're much closer to price stabilization than we are to huge price reductions from here. Any future foreclosures will come to the market at current market pricing. To think that there's additional 30-40% drops left in the areas that have already had 30-40% reductions is tough for me to swallow. To risk 10-15%, factoring in tax advantages and present interest rates, may be a driver for fueling buying activity from here. I'm expect buying activity to pick up especially in those areas hardest hit. I'm not saying prices are going up only that I doubt the areas that have seen the huge reductions are going to be hit with further huge reductions. To me a 10-15% reduction from here is worth the risk of looking at all the variables that come with home ownership or investing.

However, I would expect those areas that are not easily accessible to the median home buyer (fortified zips) to be at risk of much higher reductions than they had up to this point. As other areas are circling the bowl, these areas should get caught in the current.

Jacob said...

To think that there's additional 30-40% drops left in the areas that have already had 30-40% reductions is tough for me to swallow.

If an area when up 200% with no fundamental reason it will have to come down all the way.

Look at charts that plot the home values and for all previous busts the values came down to below where they were before the boom.

If the median income is $50k and the mediam home was $400k and dropped to $300k we still have a long ways to go.

Places that have high paying jobs like the bay area or NY etc will fair much better than Sac since we have nothing to justify the high prices.

Diggin Deeper said...

Jacob...

A median home price of $147,000 in 2000 appreciated to about $394,000 in the summer of 2005. Inflation as a price escalator at 3.5% (equalling about the same value of the falling dollar since then) pushes the 146,000 home through 2007 to about $192,000. A 50% reduction from the $394,000high takes you to $197,000. Since we're pushing between 30-40% price reductions right now, there's not much room left before we're at parity with the 2000 home price.

Could they go much lower? Sure if we find ourselves in a Depression.

Patient Renter said...

"think that there's additional 30-40% drops left in the areas that have already had 30-40% reductions is tough for me to swallow"

I don't know that anyone is calling for that, but most areas haven't seen even 30% drops yet. A lot of what should have seen those kind of drops are languishing on the market. 50% total, for EVERY area still sounds right by me. And before people start whining that "desirable" areas like EDH or East Sac won't fall that much, keep in mind that they'll still retain a price premium over other areas even after they fall by 50%.

EVERYTHING went up 100%, 200% even though it started from different price points to begin with. Therefore everything will fall similarly and wind up relative to the various price points it started with. Without their having been any changes in desirability of various areas, this is all but gaurunteed. East Sac was and still is more desirable than North Sac, but they both went up similarly and will fall similarly.

Diggin Deeper said...

PR...I think that's about right at 50% level but you will get some crazy below market prices as Jacob points out.

In order to get those kind of drops in E.Sac or the likes wouldn't you think that inventory levels would have to go up dramatically before the bubble broke? I'm sure not seein it in those zips.

smf said...

DD -

Your assumptions would be technically correct under a normal market.

1. There are period in the RE cycle where NO appreciation occurs.

2. If wages did not go up during the last years, home values could not either.

3. You don't eliminate an excess inventory easily. What happens when the true extent of the inventory problem is known? What happens to prices when you have more houses than people available to buy them at any price?

Patient Renter said...

"In order to get those kind of drops in E.Sac or the likes wouldn't you think that inventory levels would have to go up dramatically before the bubble broke? I'm sure not seein it in those zips."

Probably, but we're just not there yet for all areas. Assuming there's some relatively uniform distribution across all areas (including east sac) regarding the various stupid loans that were taken out, and also assuming that in higher income areas alt-a and prime loans were more the norm, the Credit Suisse data shows that the bulk of these types of loans have yet to reset, but will over the next few years.

ARMs aside, from what I've read about previous housing boom/bust cycles, the desirable areas will always lag the undesirable areas, all other things (such as inventory) aside, but will still be effected just the same. The ladder-like structure of real estate ensures this.

Jacob said...

Since we're pushing between 30-40% price reductions right now, there's not much room left before we're at parity with the 2000 home price.

But we will likely over shoot the bottom as well. I dunno, but even if the prices are where they should be would 100% of the inventory move? I just think we are so over built that even at reasonable prices you will still have many homes left over w/o buyers.

I'm still hoping to buy in 09, but just not really convinced we will be done with this mess by then. And I am not worried about timing the market since we will stay at the bottom for years I will have plenty of time.

Diggin Deeper said...

smf...

1. 1. There are period in the RE cycle where NO appreciation occurs.

True, but for the most part inflation adjusted increases cannot be considered normal or market supply/demand increases.

2. If wages did not go up during the last years, home values could not either.

Not only did home prices rise, they rose to meet the oversupply of dollars chasing materials and supposed thin labor forces to construct them. The spec part was the energizer that took prices beyond normal creating false demand and oversupply, and ultimately a bubble.

Wages on the other hand, stagnated during the same period as employers were able to use faulty government data (CPI/PPI) to claim there was no inflation and therefore increases were held below the real rate. In a government town those govt figures do matter. Just because the median wage is less than the ability to afford the median priced home, are you asking everyone, including yourself, to go back and start over? Maybe even start with neg appreciation and move up from there?

3. You don't eliminate an excess inventory easily. What happens when the true extent of the inventory problem is known? What happens to prices when you have more houses than people available to buy them at any price?

At some point, I'm suggesting that pricing won't move any lower. I don't know where that is, no one does. If prices do not attract buyers, speulators, or investors, they will go low enough until that happens. With interest rates as low as they are, that component alone will bring some buyers back.

watchingthebubble said...

I'm no expert here -- much of what I've learned I've learned from all of you -- but I still have a hard time believing that the average Sac metro area family can afford a home in the low $300k's or upper $200ks, or that any bank would be willing to finance them for that amount. Let's not forget, folks -- Sacramento is a state worker town. And the state isn't handing out raises, hasn't kept parity with inflation, and might have to consider layoffs if things get too dire. As you all have constantly said, a home is only worth what people are willing and able to pay for it.

That said, what I'm waiting for is one of the presidential nomination candidates to have the cojones to say this on the campaign trail:

"America, we are collectively and individually in debt over our heads. Just as the federal government must take measures to reduce the deficit, you as individuals need to take measures to reduce your debt, live within your means, and increase personal savings. Social Security will not save you in your old age; in fact, it may not even be there when you retire."

My bet: Huckabee would be the one most likely to deliver this unwelcome message, followed by McCain. Any takers?

IMHO, the "flat screen TV-SUV driving-credit card financed vacations-daily Starbucks latte" era is over. Only the frugal will survive or thrive financially in the coming months. Mind you, I'm no financial saint, but I know darn well what I need to be doing to get on track. I have accepted that I won't own a flat screen anytime soon, will probably never own an SUV (and I really wanted a Hyundai Santa Fe -- go figure) and that I will be making coffee at my desk at work with my $5.00 WalMart coffee maker for a long time to come, with Starbucks beans from Winco. (Okay, the Starbucks beans are an indulgence, but I hate Folgers.)

Got food stored?

alba said...

There is no possible way we've encountered the type of pain that will have an affect on our economy in unprecedented ways. Throw out the percentages and prices, and wait to see what kind of financial position you might be in at that time. Even if you're on the sidelines, it doesn't mean you won't be impacted. City gov'ments will be affected. Are you sure which city/state will be right for you/your family? Have a recession-proof job? Hopefully, there will be decent timing with interest rates.

We'll have to see if the higher end folks get relief needed to stem the tide. Movement in price may not be proportional, nor follow within the same timeline for each sector/region of housing. My guess is the lower end gets hammered more in overall economic impact, including housing.

aggiealum said...

I'm waiting for the big screen LCD bubble to burst. Demand from the lower income brackets are sure to drop soon. The higher income brackets probably have all the LCD's they need. When the "keeping up with the Jones'" attitude amongst the lower income brackets comes to an end, I will swoop in and buy a 52" LCD for my bathroom at rock bottom prices.

Cmyst said...

watchingthebubble:
I believe that Ron Paul has pretty much said "America, we are collectively and individually in debt over our heads. Just as the federal government must take measures to reduce the deficit, you as individuals need to take measures to reduce your debt, live within your means, and increase personal savings. Social Security will not save you in your old age; in fact, it may not even be there when you retire."
I'm not a Ron Paul supporter, but you asked. Huckabee, being a Southern Baptist minister, probably deep-down inside believes that government has a role to play in supporting the poverty-stricken and elderly. If you do a little digging, you find that many evangelicals (who come from economically-strapped areas a lot of the time) have no problem with government largesse. McCain has voted AGAINST tax cuts in the past, and he believes we should stay in Iraq -- maybe for a hundred years? So, not likely he's going to push hard for balancing the books.
Nope. I think Ron Paul's your guy.

Marin Family Guy said...

Take from those who were prudent to protect those who weren't. That's the free market in action.

watchingthebubble said...

Cymst,

Thanks! That was extremely educational. Ron Paul doesn't get a lot of press, so I can't say I know much about him or what he stands for. I thought with Huckabee trying to eliminate the income tax in favor of a consumption tax, perhaps he would be most likely to utter those words.

I never cease to learn something new on this site!

Diggin Deeper said...

There are so many variables outside our control. What happens in Santa Ana, or Eureka, or El Cajon directly affects what happens here. We're basically held hostage to the revenue generation of cities and counties throughout the state. When they're hurting our problems magnify.

I've posted this before, the only plausible way for the excessive inventory to be consumed is through industrial development, population increases, and job creation. That's only going to happen when the city figures out there's more checks in the checkbook than money in the bank.

Sacramento has an educated workforce with subpar median wages. Housing is plentitful, land is available, utilities are reasonable, infrastructure is good, and home prices continue to fall. At some point, major companies will begin to look for venues that that fit these criteria and Sacramento should be high on the list of companies looking to expand. With an economic downturn, fewer players will be candidates, but one or two companies that generate 4000-6000 total jobs will go along way to help with our real estate overhang.

It's too bad that Sacramento city fathers have gotten "fat, dumb, and happy" with their town. As usual govt is behind the curve lacking innovative ideas and the foresight to push this ciy into the future. The time to attract new industry is when the city is humming, when there are resources available to make commitments or entice businesses to come.

All the criteria are there. We just need promotion and incentives to make a difference.

SacramentoCrash said...

babelfish translation:

Dunmore = Do Nothing

Watch out for those newly developed areas that look like ghost towns. Better to be last in that first in.

SacramentoCrash said...

AdAge's Sales "Consultant" rant:

http://adage.com/garfield/article?article_id=123355

These Agents Will Wallow in Conflict Like Pigs in a Sty for Their 7% Cut

"inherent conflict of interest Realtors wallow in, like pigs in the sty, all the time. They have no incentive to perform due diligence for buyers. They don't even have incentive to protect their clients, the sellers. Their only interest is in closing the sale. Seven percent of $500,000 is $35,000, no matter who else takes a bath.

That's why they steer buyers to their own listings. That's why they have cozy understandings with appraisers and mortgage brokers. That's why they sniff the cat odor and declare it a piece of lint in the furnace. They are now and always have been salesmen posing as advisers. Please note that your CPA does not have a magnetized sign on his car door.

So if a slick TV commercial directs you to housingmarketfacts.com, caveat caveat caveat freakin' emptor. For facts you can really bet the house on, you might also check out rottenlyingsleazyrealtors.com."

sailingnightwatch said...

The man is hard on realtors. There was a lot of greed to go around as the bubble grew, from developers through homebuyers and everyone in between. Hopefully this will last long enough to flush some of these people out of the marketplace with sufficient pain to cause them to do the due diligence in the future, if they have a future in this industry. I believe I heard this morning that the leader for Morgan-Stanley was saying even they had to accept some blame for the current situation.

Patient Renter said...

Cymst is right. That sort of warning statement has been coming from Ron Paul for years, not just during this election. He's actually the only one who will even talk about certain economic issues such as the Federal Reserve, which is not surprising being that all the other candidates receive hefty contributions from big banks and wall street, both of which benefit greatly from the Federal Reserve system. Regarding debt, Huckabee and others tend to borrow a lot from Paul (Huck even talks about "printing money" and "borrowing from China" nowadays, phrases directly lifted from Paul). It's interesting that Huck will talk about printing money, but not who prints it. Anyways...

"I thought with Huckabee trying to eliminate the income tax in favor of a consumption tax, perhaps he would be most likely to utter those words."

Yes, and with your new found interest in Paul you might be interested to know that he would eliminate the income tax and replace it with nothing, along with the Federal Reserve. He's pretty much a free market economist and has written books on economics, monetary policy, etc.

alba said...

dd, I agree with your assessment. I do have a different perspective on what attracts business. I lived in Scottsdale for 6 years (99-05), and saw throngs of companies move back-offices, datacenters, even headquarters, to AZ. It wasn't just a mass exodus of people from CA, It was companies/jobs, and people came from everywhere. Their huge growth has been stimulated by corporate decisions to move operations there, for the same reasons you mention. Housing will continue to be cheaper than places like Sacto, but, more than anything, the true cost of living, and true cost of doing business, is far cheaper in AZ. Public schools are not better, but come at a lower cost/student. Water, energy, food, cost of local government, property taxes, sales tax, state tax...its unbelievable how much more it costs to live in CA. Being from norcal, it wasn't enough for us to stay, but, from a business perspective, it will continue to be far more attractive than CA. It may take longer than a normal turn in economic conditions to bring back the people/jobs/business. The cost of energy alone in CA is criminal(PG&E)!

aggiealum said...

Dunmore was considered a local builder right? Not the likes of Centex, KB Homes, DR Horton?