Thursday, June 12, 2008

Finally: Analyst Predicts 50%+ Decline For Sacramento Housing

From CNNMoney (hat tip Average Buyer):

With home prices plunging by more than 30% in some markets, bargain-hunters are ready to pounce. But it may pay for buyers to wait. Many housing experts say that the worst-hit metro areas have even farther to fall, and could see total drops of as much as 50%.
Many erstwhile bubble cities have sustained particularly brutal hits. The median-price of a home in Sacramento, Calif. was down 35% during the three months ended May 31 compared to the same period last year, according to the real estate web site cities in California's Central Valley, such as Stockton (-39%), Modesto (-37%) and Bakersfield (-29%), also recorded steep declines.
"The housing boom was unprecedented in U.S. history," said Michael Youngblood, a portfolio analyst with FBR Investment Management, "and the correction will be as well."...Youngblood expects that these markets will likely endure total price drops of 50% or more.
Currently, several Sacramento home price measures have crossed the 40% off peak threshold. Compare that with some other famous housing busts:
[P]rices are falling faster and further than in any other post-war housing bust. [Prices are also falling faster than during the Great Depression.] During the bust in Austin, Tex., which started in 1986 and is one of the worst on record, prices fell 25%, according to Local Market Monitor, a financial data provider. And that cycle took four years to bottom out. In other major downturns, prices in Los Angeles fell by 21% during a six-year period in the 1990s, and Honolulu home prices saw a decline of 16% in the five years starting in 1994.
Given the lack of American precedent, it might be a good time to brush up on the history of the housing bubble in Japan (where home prices in the largest six cities fell by 64% over a 13-year period and Tokyo fell by more than 80%).

From Bloomberg:
Almost $70 million of tax-exempt bonds were sold in June 2007 to build roads and sewers for thousands of new homes planned for Elk Grove, California, once the fastest growing city in the U.S. A year later, the lots are largely vacant and the bonds lost 41 percent of their value.

The debt plummeted as construction all but ceased after the biggest developer on the Laguna Ridge project fell behind on the property taxes used to pay interest. Scattered homes sit among tracts overgrown with weeds as housing sales wilt. "It's stopped completely,'' said Onkar Singh, 76, who lives in an adjacent development in the 129,000-person town outside Sacramento. "Everything's vacant."
From the Appeal Democrat:
Nearly 50 employees at the Kbi Norcal Truss plant in Olivehurst will be without jobs next month, victims of the slumping housing market. Mark Kailor, vice president and treasurer of San Francisco-based Building Materials Holding Corp., which owns the Olivehurst plant, said the decision to close the plant was made because of market conditions.
"What we have in terms of manufacturing is based on the housing industry; hopefully they will come back when the market turns," [John] Fleming [Yuba County's economic development coordinator] said.
From the Modesto Bee:
Finally there's some good news on the foreclosure front: Northern San Joaquin Valley mortgage default rates seem to be stabilizing. After nearly two years of staggering increases, the number of homes issued notices of default, the first step toward foreclosure, was lower in May than in April or March.
"The region definitely is stabilizing. It's stabilizing at a pretty high level, however," said Sean O'Toole, who founded and runs ForeclosureRadar...."The banks still are taking back more inventory than they're able to resell," O'Toole said...He said the three counties were among the first in California to enter the foreclosure crisis. "Now I think you're leading the way out."
From the National Review:
Until this week, that predatory-lending narrative dominated the housing conversation. But in the past few days, three poster children for irresponsible lending and borrowing have taken center stage in the debate over the housing bailout...The first is Rep. Laura Richardson, a California Democrat...The second poster child is Michelle Augustine, another Sacramento homeowner (what’s going on down there?) who was featured Wednesday in a Wall Street Journal article about a phenomenon called "buy and bail."
Nowhere in the Journal story does Augustine claim to be a victim of predatory lending. She presumably understood the terms of her mortgage, and she knew her payments would go up. Like many Americans, she probably just assumed that house prices would continue to rise and that she could refinance into a more affordable mortgage once that happened.

Assuming Augustine’s lender had accurate information about her income, it made the same mistaken assumptions about house prices and her ability to pay that she did. Congress wants us to bail these people out. Instead, they deserve each other — and whatever consequences befall them.
More discussion of the legality of "buy and bail" over at the Volokh Conspiracy blog.


Deflationary Jane said...

Wow My world just shrunk! It's been years but I didn't know Eugene had a blog. He's a smart cookie and terribly nice guy IRL

Patient Renter said...

I didn't know that Perfect Storm was a financial analyst. It's also wierd that the media is quoting a statement of his that is several years old.


Deflationary Jane said...

Yep go go PS!


So if Sippin wasn't buying all the way down, I call BS! And he's a hypocrite if not, especially posting bullish comments and links for 2+ years.

HousingRealist said...

Where are you seeing PS quoted?

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

With mortgage rates rising and inflation hitting on all cylinders, it's fairly easy to see the declines continuing. The 10 year Treas is now up between 4.25-4.30% translating to a mortgage rate that's pushing toward 7%. It plays right into the hand of falling prices as affordability erodes dollar for dollar with rising rates and costs.

The Fed must protect our financial industry with easy and cheap access to money, so they're boxed in when it comes to raising rates. Lot's of talk which is supposed to prop up the dollar but actions really tell a different story. And a quarter point rise in fed funds would do nothing but provide window dressing. I expect the jawboning to fail, the dollar to continue its fall, and inflation to run unabated until the financials can clear their books of toxic level 3assets. They continue to visit the Fed window and trade level 3 BS as collateral for "clean" our financial mess is far from over. Once they're able to stand without govt. assistance, the Fed is then free to deal with inflation. If they ignore it the bond market won't and will produce interest rates that reflect the true picture of inflation as it relates to the rest of the economy...just as we're seeing with rates today.

So RE prices have basically been given the greenlight to move lower. How much is anybody's best guess.

Diggin Deeper said...

"And presumably, since Augustine made her fraudulent intentions clear in a national newspaper, her bank will have a good case against her should it decide to sue her to cover its losses."

And just for the record, "buy and bail" as a tactic, looks like it
may have civil litigation consequences...Nobody could be so foolish to report their intentions and not set themselves up for a battle with the injured bank...regardless of what the guvment law states.

Sorry, no David and Goliath story here.

mcb44 said...

According to Metrolist, there are 261 homes priced above 200K listed in Auburn today with 38 pending sales. Of those,

128 are listed for >500k
133 are listed for <500k

Of the 38 pending sales, only 7 are for homes listed for >500k

Seems a pretty clear indicator of what it price point it takes to sell a house nowdays, at least in an area with minimal big builders and not too many REOs relative to the other Sacramento areas. Kind of raises the question of just how much it really is "different here".

Patient Renter said...

Why do I keep hearing so many people say things like "X will happen"..."when the market turns", as if the market "turning" will be some grand event that will soon come and fix everything. They seem to have no understanding of housing downturns, historically, let alone this one.

Ollop said...

PR, I think you have a good point. The "experts" all seem to point to a "turnaround" as if housing prices will form some sort of "V" bottom. Instead, they'll likely bounce around the bottom area for some time before heading higher. That's good for future buyers since there is no rush to buy at current levels.

Since I'll be moving to the Sac area I've been looking around West Sacramento (Southport) and prices are getting more compelling. IMO, they'll be better in a year, but I have no idea by how much. The downside is I have to sell or rent a house in Contra Costa county.

Deflationary Jane said...

There is no slowing down of REO activity in Southport. If you can hold out for another year, you will do very well. This is provided the area doesn't go downhill from the masses of rents a'la Elk Grove.

Jacob said...

Yea it does seem that the "recovery" (i.e. getting back to 2005 prices lol) will happen soon according to "Experts". Just a short time at the V shaped bottom then shoot right up.

The bottom will be more like L_____-_-_-_-_-_-_....

But the biggest problem I think is that the new REOs are being added faster than the existing ones are being sold.

So sales and foreclosures may level off, but since foreclosures > sales then you still have inventory rising (regardless of if the banks are listing it for sale or not, it is still there).

Which will push prices lower and lower.

So we are already at what, 40-45% off peak? Now finally "Experts" are predicting 50%. A few years ago it was 5%.

So that translates to what? 75%?

That is what I have been predicting at any rate.

Few good jobs + Layoffs + Over Built + Foreclosures outpacing sales + Most people have no savings + Tighter credic = Recovery just around the corner?

And a mojority of sales are going to speculators now anyway. So most of them expect to flip the home in 6 months to a year.

When all the flipping shows are canceled then it will be time to buy. Seriously how many of those shows are there:

Flip This House
Flip That House
Flipping Out
Property Ladder
Property Virgins
My House Is Worth What

When every last one of them is canceled then I will be ready to buy.


Diggin Deeper said...

So that translates to what? 75%?

That is what I have been predicting at any rate.

Wow, now that's worth waiting for. We'll be able to pick up $ Milion homes at the high for around $250K...4000-5000 sq ft palaces for about $55-65 per...

That would be a real gift to prospective homebuyers....

alba said...

I'm seeing dropping prices in the $600K-$800K in Rocklin, and many more homes going into foreclosure.

Also, I'm seeing more homes being purchased at courthouse auctions, which is an indicator the banks are beginning to dump the loans with little issue of timing in exposing mortgaged-backed securities (not that they won't have tons to unload still). NTS sales have to be the least expensive method for unloading bad loans, even at 25% discount of property value.

Jacob said...

Wow, now that's worth waiting for. We'll be able to pick up $ Milion homes at the high for around $250K...4000-5000 sq ft palaces for about $55-65 per...

Well my prediction is as good as anyone elses guess.

But of course there will be homes that take a bigger hit and homes that hold up better.

There were plenty of homes selling for $400k that are only worth $100k.

A Million dollar home for $250k would get me interested for sure :)

But I will be happy with a 3000 ft2 home on atleast half an acre in a nice area for $300k.

Will it happen? I dunno. But I am willing to wait and see for a while.

James said...

"But I will be happy with a 3000 ft2 home on at least half an acre in a nice area for $300k."

So you want a home in the top 25th percentile of all homes in the county. So with the 2008 median income in Sac Co being $71,000 and the top 25th percentile being $116,000. This income can easily support a $400,000 loan, so why would a 3000 sq ft home on half an acre ever fall to these levels for any sustained period of time. There would be just too much demand. At 80% LTV, your $300M house would have a payment of $1438/mo. What do you think a place like that rents for? Again, it just ain't going to happen.

Diggin Deeper said...

James, agreed! I doubt we'll see prices go that deep. However if you bought a $700K plus tract luxury model, remember, its still a tract home subject to your neighbor's financial problems. I've seen quite a few in Rocklin that pushed over $750,000 at the high that are now foreclosed. My wife has one in escrow in sub $410K at about 3700 sq ft. We're quickly moving toward $100 per sq ft.

James said...

Diggin Deeper,

Thanks. $100 sq ft. for Rocklin, that is getting cheap. I have seen a few REO down at level in 95765 as well. The banks have finally given up and are just giving houses away. This is way, way below replacement cost. To go out and buy land, take it to final map, then build cost at least $150-175 sq ft right now in Placer and El Dorado counties. Land prices are tanking by the day so this might be a little cheaper in the coming year, but not much. Entitlements are costing so much now. I have been working on a commercial development project on Florin Perkins and Morrison for nearly three years now. Just when you think the county will say okay, they want a new stop light. (take a guess at what business I am in?) Anyways, I digress. Point being, housing cannot stay below replacement cost for a protracted period of time. All official estimates project Placer County to have a shortage of housing in the next decade. At some point supply and demand will come back into play. Do you really think Westfield would be expanding the Galleria if they did not expect future demand? The widening of 80 will make commuting much more friendly. Some day light rail will make its way to Rocklin (if idiots in Rossville get their heads out of their asses and stop worrying about us scary downtown people from infiltrating the burbs). The casino in Rocklin will break the three story limit in Placer County with their new hotel. Panatoni is itching to build a 5+ story office building in Roseville. This area will grow and home prices will se a bottom in the next year. I do not think prices will stay stagnant for years and years to come. They will bottom and then resume a CPI= 1% annual increase.
Sorry for my rant, but I had a few martini's at Mason's tonight and am a little fired up. I am just so tired of all the doom and gloom.

Jacob said...

What do you think a place like that rents for? Again, it just ain't going to happen.

Well if "Experts" can fantasize about a bottom arriving every month, can't I fantasize about a great home for a ever greater price? :)

Do I think it will get that low? Not really. But how much further will we go from here? I don't know that one either.

So in the mean time I am just in wait and see mode. Continue to save and wait for the markets to stabilize.

In Japan, Tokyo fell 80% over 13 years. So it is not undeard of. I would prefer we reach the bottom in less than 13 year tho...

Jacob said...

I do not think prices will stay stagnant for years and years to come. They will bottom and then resume a CPI= 1% annual increase.

I am not sure about that. Mainly because foreclosures are higher than sales. But I hope you are right cause then I can buy next year or the year after instead of having to wait 5 years or more.

I will wait as long as I have to, but definitely would prefer to reach a bottom sooner so I can buy sooner.


James, where do you get your facts? There's no way Sacto's median income is $71K.

The Galleria expansion plans were in place 5-years ago, back when cities were spending like drunken sailors on schools and new fire stations. That doesn't really mean anything. Bear Sterns was paying out million dollar bonuses last year, what did that say about how business was doing?

The firm that wanted to build that 5-story office building bailed on those plans over 2-years ago when they saw the economy tanking, and that was early, doubt they're rushing back into those plans seeing that every commerical property in South Placer has a "for lease" sign nailed at every entrance. The casino is in Lincoln, not Rocklin, and the hotel will actually be 20+ stories. Sober up before you post.

Deflationary Jane said...

Sacramento County, 2006 all in 2006 inflation-adjusted dollars

Median household income 53,930
National Average 48,451

Median family income 62,523
National Average 58,526

Per capita income 25,596
National Average 25,267

To give those numbers a little perspective -

Average household size 2.70
National Average 2.61

Average family size 3.31
National Average 3.20


Population 25 years and over
High school graduate or higher 84.9
National Average 84.1%

Bachelor's degree or higher 27.8
National Average 27.0%

and since we're talking about affordablilty of O/O homes

Owner-occupied homes, Median value (dollars) 389,200
National Average 185,200

I'm sure many people find those numbers nearly as fasinating as I do.

Deflationary Jane said...

bah typos!

should have been

'I'm sure there aren't many people how find those numbers nearly as fasinating as I do.'

James said...

Typo on my part too: CPI + 1%

Check out HUD median income numbers here:

I am also using info compiled by the City of Rocklin for future job/income/housing units/population growth.

James said...
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Deflationary Jane said...

"I am also using info compiled by the City of Rocklin for future job/income/housing units/population growth."

Well there's your problem! While I really appreciate data collection at the local and regional level, I also seldom trust the published results. Too much pressure to only release warm and fuzzy data. That includes CADoF too.

--The rest of this will get kinda preachy. If you've heard my soapbox speak on data collection before, you can safely skip the rest of the post.--

Even at the Fed level, not all annual estimates of economic data are equal.

Your FannieMae 2008 estimates are pushed from HUD data which comes from BEA and BLS.

"FY 2008 Calculations
The FY 2008 personal growth rate was based on data received from the Department of Commerce, Bureau of Economic Analysis, from the beginning of the third quarter of 2005 to the end of the second quarter of 2006. These were the latest data available at the time."
For a state to qualify as distressed based on the personal income growth rate, the state per capital income growth rate must have been less than 4.8, which is 75 percent of the average national personal income growth rate of 6.4."

That 6.4 average assumption is interesting. Estimates derivied from 3Q2005 to 2Q2006 are not accurately reflect the marketplace of 2007-2008.

That 6.4 national average doesn't inspire a whole lot of confidence either. Ask yourself: While employed in the same position with the same duties, did my wages increase 6.4% in 2007? Will they grow by that much this year? I'm guessing most everyone will say no**.

I use the numbers coming from the US census. They are the blandest of the bunch. I have a distrust of the estimates coming from Bureau of Labor Statistics or Bureau of Economic Analysis. The BEA is who told us inflation was 1% (vs 6.4%)for years and BLS tells us our unemployment rate is still low. Not a good track record.

** I do know of 1 person making more for the same job. He is a BK attorney in Atlanta. He's not charging more per hour, just his case load jumped up.

alba said...