Tuesday, February 12, 2008

WSJ: Still Way Too Early to Go Bargain Hunting in the Bubble Markets

From the Wall Street Journal (hat tip Calculated Risk):

If you own a home in a former bubble region like California or southern Florida, there's bad news… and really bad news. And they suggest that it is still way too early to go bargain hunting in these markets, although -- of course -- there is always the occasional deal around.

The bad news is fresh market data published Monday night by real-estate Web site Zillow.com. They show prices, as expected, kept slumping through the end of last year.

But the really bad news is that, even after a year of misery and falling prices, homes in many of these regions still aren't cheap. They remain wildly overvalued compared to average personal incomes. There is a strong long-term correlation between the two figures. And in many regions, house prices would still have to fall a very long way to get back into line. How far? Try around a third in Florida and Arizona -- and closer to 40% in California. Yes, from here.
From News 10 (video):
Countrywide Financial notified 122,000 customers that they may no longer draw on their credit lines, even if they were previously approved for a higher limit...One of them is a woman who spoke to News10 and asked that her name not be used. "Apparently the fact that I have excellent credit, that I am not late, and that I have lived in my home for 25 years didn't count for much," she said.
In a statement on its Web site, Countrywide said federal regulations allow lenders to block additional extensions of credit in a declining market [pdf].
From the Sacramento Bee:
...January struck an especially hard blow to homeowners in Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and Yuba counties. Banks in the eight counties repossessed 2,292 properties – 755 more than December – according to foreclosures.com, a Fair Oaks-based Web site for real estate investors.
From the Associated Press (via Forbes):
A growing share of home sales are from foreclosures, especially in states hardest hit by the housing bust. In some parts of California lately, nearly 50 percent of home sales come from foreclosed houses.
In December, 46 percent of homes sold in the Sacramento area and 31 percent in the San Diego area had gone through foreclosure, up dramatically from about 4 percent a year earlier, according to San Diego-based DataQuick Information Systems, a real estate information firm.
From CBS 13:
It's called "Cash for Keys," and it's been happening for years, but the strategy has been kept quiet. Until now...The deal is simple: Occupants get out within 30 days without trashing a house, hand her the keys, and she hands them back a check from the bank. Then it's done.
CBS 13 has video of the San Joaquin County mansion ransacked by thieves. Also from CBS 13: Foreclosed Homes With Pools: Home To Mosquitoes

From the Sacramento Bee:
Don Snyder's voice cracked as he talked about the end. The emotion welled up from owning Sacramento's oldest toy store, from the joy of selling playthings to Sacramento's children to watching his own kids grow up in the store's aisles. Now it's almost over. Soon Carousel Toy & Party will close for good. Snyder is shutting down the Fulton Avenue store, a Town & Country Village mainstay that started as Bob's Toyland in 1951. He's endured rough patches before, but this year the economy, the housing market and consumer confidence in toys all tumbled at once. Holiday shoppers didn't come to the rescue.
The housing market's slide – the Sacramento area is among the nation's hardest-hit – continues to hurt retail spending. So does the volatile stock market – along with high prices for gas and food, the escalating credit crisis and a weak job market.
From the Modesto Bee:
Northern San Joaquin Valley home values have declined so much that more than a quarter of homeowners can expect to pay less property tax next year. About 37,000 Stanislaus County homes will be reviewed. Their assessed values are expected to drop 10 percent to 40 percent, Assessor Doug Harms said Monday.
Assessors will be more aggressive in lowering San Joaquin County home values this year. "We're reviewing (home purchases) back to 2002," said Ken Blakemore, San Joaquin's assistant assessor.


commonsense said...

"But the really bad news is that, even after a year of misery and falling prices, homes in many of these regions still aren't cheap. They remain wildly overvalued compared to average personal incomes. There is a strong long-term correlation between the two figures. And in many regions, house prices would still have to fall a very long way to get back into line. How far? Try around a third in Florida and Arizona -- and closer to 40% in California."

Wow, another 40% expected to fall. I wonder if all gooffes currently buying at 90% market value realise by next year their investment plunges another 30%.It's still a falling knife with no bottom in sight. Feb.16th and 17th homes auctions will tell us a lot of people ignorance.

SacramentoCrash said...
This comment has been removed by the author.
commonsense said...

Question for the board. I remember it has been posted a while back on this board the Sacramento real estate appreciation historical chart. Any has any link? Thanks.

sacramentia said...

Before putting to much stock in the 'another 40%' click through to the data. It is all from Q4 07, here are some highlights-

Folsom down 6% Year-to-year.
West Sac down 11.8%

Pretty cool map to look at but the data seems a little old.

HOUSE2008 said...

Ouch. Another 40%? What kinda effect will this have on banks balance sheets? Maybe project Slipknot will help h/o with the difference of purchase price & what it's worth. It'll be Christmas time all year long.

mechanico said...

Prices needed to drop 50% from the peak and they have already dropped 25-30%. Inflation will account for a little of that. Another 15-20% is likely but not 40%

Jacob said...

until recently analysts were saying all the declines were over, "maybe" there would be another 5%. Well we are way past that.

There will be 75% declines from peak in some areas. Of course some areas will hold up better. Sacramento won't be one of those places though. We have nothing to justify the prices so the prices will come down.

As for banks if they had to mark to market all their assets most if not all would be insolvent. Their only option is a long slow bleed.

G Spot1 said...

sacramentia, I don't understand your point. Are you saying data from the most recent quarter is old?

sacramentia said...

I don't understand your point. Are you saying data from the most recent quarter is old?

Pretty much...the market is deteriorating so fast that we are already into that 40%.

I wonder why WSJ says 40% more. If we are currently at 2002 prices, then another 40% would take us back to 1993/1997 price levels not accounting for any inflation. That is a pessimistic prediction even for this board.

Anonymous said...

I strongly suspect Sacramentia of actually being the fake online name of realtor Julie Jalone.

In fact, I've noticed the postings for quite awhile bear a striking resemblence in both grammar & syntax to Ms. Jalones prose. Also notice how all of the comments perfectly reflect a realtors viewpoint.

RMB said...

Don't forget that things tend to overshoot on the downward slide also. So prices could go down another 40%. I am thinking they will end up down another 20% here in Sac, but you still have people trying to get 2005 prices for their homes. They are in for the shock of their lives. I think the really major fall is still to come in SoCal and the Bay area. There is a graphic somewhere which uses Venn type concentric circles to show how bubbles work. (Itulip IIRC) This is playing out just about how that graphic depicts it. It is going to be a few years before the dust settle and there is a lot of burning left to be had.

SacramentoCrash said...

Prices need to drop back to 2002 pricing levels in many of the middle class markets to be in balance price versus incomes.

sacramentia said...

I'm not Julie and I'm not even a Realtor. I think Julie is in Auburn and if you've been following my posts it is pretty obvious I live in El Dorado Hills. I've also mentioned my wife a few times. Even though you are wrong you made me feel important by trying to figure it out. Thank You!

commonsense said...

Another 40% drop will bring us down to 1997 level. Is it possible? Click on the link below and scroll down to Japan land crash.Any place on earth on more land scarcety then Japan?


bubblemachine said...

sacramentia said... I'm not Julie and I'm not even a Realtor.

If you talk like a realtor and you drink CAR Kool-Aid like a realtor, the readers of this blog will assume you are a realtor. Most realtors have zero cred on this blog because their previous predictions and statements have been proven wrong. It is obvious that they only care about making money off their commissions and will say or do anything to sell real estate.

Cow_tipping said...

1997 prices in sac were bloated by real jobs, you know the kind at Money store, Intel, HP, Oracle ...
Now there is 10 times the supply and those jobs are in India and china.

mechanico said...

Prices will fall back in line with income and rents but there are too many vultures circling. Everything priced under market, in a decent area, gets snapped up quickly. Remember we have no shortage of fools in Sacramento. I'm out there lowballing and in the past month I've witnessed investors buying properties they couldn't possibly break even on, young couples buying well above market. Everyone thinks they're getting a deal. Crash yes, but I don't think there will be much of an overshoot.

sacramentia said...

I posted the 6% and 11% numbers as a point to question the Zillow data. The other data shows much steeper declines than that, therefore, that makes me question the prediction.

Does anyone agree that W Sac and Folsom only fell 11% and 6% between Q406 and Q407? (more like 18-20%)

I don't know what data Zillow is using, but those numbers don't pass the reality check of just looking at homes sales in the same neighborhoods over that time.

I hope that prices keep falling so I can buy investments and a cabin cheaper...I will continue to lose on the homes I own now but I sold off 75% of my property between 2004-2006 and paid down the notes on the others to 20% LTV to weather the downturn.

mechanico said...

I've never trusted zillow figures.
DQnews is the only source I trust.

smf said...

"Another 40% drop will bring us down to 1997 level. Is it possible?"

The problem with making that prediction is that with all the fraud that went on reliable figures on the excess inventory is not available.

Jacob said...

So what happens when you take another 40% off and there are still left over homes...

We are way over built, there are few jobs in the area to support high prices, even at 40% off from now many people are priced out (now that they have to document their income properly and the bank expects to get paid back)...

There are auctions going on and no buyers even at the starting prices of 50% off.

Specuvestors can continue to bleed money for a while but for how long.

I think when the last flipping show is canceled because nobody watches anymore and all the specuvestors are broke or onto the next big thing, it will be time to buy.

RMB said...


What you are seeing are future foreclosures. If the numbers don't work, no amount of wishful thinking is going to make that pig do anything but suck money down the drain. At some point the media will be reporting that real estate is the WORST investment on the planet. Right about then would be the ideal time to have cash to snap up the deals. Competing with the posers right now is an effort in futility.

mechanico said...
This comment has been removed by the author.
mechanico said...

This bubble was unfortunately a poor education for the population. People are still babbling about "long term investments" and "positive cash flow". There are enough fools out there that when rents cover mortgages that inventory will clear. Which means another 20% decline.Work in inflation and the Fed crashing interest rates again, along with some bailouts and freezes.

Jacob said...

You still need to find a renter tho. Are there enough renters to rent every home and every condo and every apartment?

If not then rents go down which will definitely continue to hurt your "investment".

mechanico said...

Forclosures mean new renters,of course some will move out of the area or move into with the inlaws.

Many renters will become buyers when rents and mortgages are equal.

I'm not arguing over when real estate will become a good investment.I've just noticed as prices drop new batches of vultures jump in. There are plenty of fools to cushion the fall from here on out.

I also think there are deals to be had with alot of pavement pounding.

The bubble burst in 2005 and at the time it would take a 50% decline to bring prices back in line with rents.

DQ August 05

most current

Factor in inflation and we are getting close.

alba said...

When rents and mortgages are equal, or favor mortgages, what criteria do you use if the price of housing is still depreciating, and interest rates are still low?

mechanico said...

Average income in the area is about $55,000. Conventional wisdom says you should spend no more than 33% of your income(gross)on housing. The average person could afford $15000-1600 either renting or buying. At a 5.75% interest rate the average person in Sacramento can afford a $275,000
home. $275,000 won't be the bottom but it will be where prices level out. Just over 5 times average income.

Jacob said...

33% is too high. It should be no more than 28% for the median wage earner.

28% of 55k would allow a payment of $1280. At 5.75% interest the mortgage amount should not exceed $215,000.

215k/55k = 3.9. This is closer to the x3 income it should be.

So your 275k home still needs to drop another 25%.

And don't forget closing costs which will effectively lower the maximum purchase price unless the borrow actually has a down payment which eliminates many potential buyers.

Jacob said...

The bottom is still a ways off, was watching the news last night and they were talking about the actions coming up. Interviewed some guy that was looking for a property that he could "double, tripple, or even quadrulple" his money on in a few years.

Yea he actually said he wanted to quadruple his money.

So buy a home for $200k and wait a year or 2 and sell it for $800k... Thankfully those times are long gone.

Patient Renter said...

Jacob: that's ridiculous. I know there are plenty of knife catchers out there, but you've got to be a downright fool to think you're going to double, triple or quadruple anything except your debt by buying a home.

btw: why were you wasting your time watching the news ;)

siflsockpuppet said...
This comment has been removed by the author.
siflsockpuppet said...

What criteria keeps me from buying now? The cost of repairs, higher cost of homeowners insurance, lack of mobility, continued price erosion. Last month a fence panel blew down and a tile came off the roof of this 5 year old rental house. My expense - $0. If I bought this house a year ago, I'd have -$50k equity and would pay for those repairs. Why WOULD I buy?

I'll wait until prices are stabilized or rising due to a lack of continued foreclosures, or prices are so ridiculously low that I'd save thousands a year by buying a house that I actually want to live in until I die. We're not there yet. Working those foreclosures through the system is the major indicator for me. Those helped [sic] by Hope Now are still losing their houses - article.

Jacob said...

Yea it almost floored me when I heard that. I'd be happy with a secure 10% return per year on somthing.

But until all these would be investors go broke or realize that housing is not a good place to invest we will not reach the bottom.

At least they will help lower the comps each time an specuvestor buys then goes to foreclosure.

aggiealum said...

Sacramento median house price $197600 by CNNmoney.com today.

Lander said...

The article should say $297,600. (See the NAR report linked in Thursday's post.)