Monday, August 18, 2008

DataQuick on Sacramento: Price Declines Exceed 45% Off Peak

From the Sacramento Bee:

Median sales prices of existing and new homes combined in Sacramento County fell to $210,000, the lowest since June 2002. The number of sales in the county was up 73 percent from last year and was highest since October 2005. Prices have now fallen 45.7 percent from their August 2005 high of $387,000.
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Bank repos accounted for as much as 80 to 90 percent of July sales in some parts of hard-hit Sacramento County, according to the Sacramento Association of Realtors.
One thing missing from my chart of Sacramento home prices as well as The Bee's interactive chart is a perspective on sales figures. Although not about Sacramento, Peter Viles of the LA Times provides an interesting look at the relationship between sales bottoms and price bottoms.

From the Sacramento Business Journal:
Granite Community Bank is profitable, but its real estate-heavy loan portfolio has bank regulators looking for reassurance. The bank has entered a “formal agreement” with the Office of the Comptroller of the Currency, the regulator of nationally chartered banks, that requires it to create detailed plans as it faces the potential of continued deterioration of real estate loans. The 2002 startup in Granite Bay is well-capitalized and profitable. But the federal regulators want the bank to detail how it will stay that way.
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Granite Community was started with a real estate focus, and the Sacramento region “is high on the list of areas where regulators have concerns about real estate,” [David] Kaiser [Granite Community's chief executive] said.
From the Sacramento Business Journal:
In a downtown Sacramento market with new office buildings under construction and little demand from tenants for space, AKT Investments Inc. has temporarily suspended its application to build a 24-story tower on K and 15th streets and will consider modifying the project.
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Office vacancy has been on the rise for the past year, up by as much as 2 percentage points, according to several brokerages, reflecting a downturn in the housing market and the economy in general. There have been fewer company expansions and little growth with firms relocating to Sacramento.
From the Sacramento Business Journal:
Hefty paychecks and higher-valued homes helped Roseville and Elk Grove become two of the nation’s 50 wealthiest communities with at least 100,000 residents, at least before the free fall of the real estate market. Sacramento — which boasts deep pockets in areas such as East Sacramento, the Fabulous 40s and Land Park — finished at No. 88, between Inglewood and Reno, Nev.

Of course, California’s once-booming housing market created some of the wealth factor, with five of the Top 10 cities and 17 of the Top 20, according to a just-released Bizjournals report based on 2006 data, the latest available.
From the Sacramento Bee:
[T]he Sacramento area's unemployment rate jumped last month to 7.3 percent from 6.8 percent in June, the department reported. The half-percentage-point bounce was the highest single-month increase for the region since the state started keeping regional statistics in 1990.
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"The story behind the job numbers is that the state's economic weakness is spilling outside of real estate," said economist Jeff Michael, director of business forecasting at the University of the Pacific in Stockton. "It's the same theme for Sacramento."..."Some people are still debating whether the nation is in a recession," Michael said. "For California, I think the debate is over."
From the Sacramento Business Journal:
Attorneys say conflicts and lawsuits are up, many from the difficulty in financing deals or carrying land when the economy dips, land prices fall and commercial tenants stop looking for larger offices.
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“Our construction practice has been very busy,” he [Ed Quinn, managing shareholder of McDonough Holland & Allen PC] said. “Developers are finding it difficult to pay for infrastructure improvements. There’s no question that subdivision and other types of developments are underwater and have come to a grinding halt. Disputes arise as to who ought to be responsible for costs.” He said contractors’ liens are on the rise, as are claims against title insurance policies.
From the Manteca Bulletin:
What is the best flippant way to describe the Manteca housing market in four words? The vultures are feasting. A stratospheric 52 homes went pending in the week ending Aug. 11 for an annual pace - if it holds - of 2,704 homes.

The accelerated sales pace doesn't surprise Florsheim Homes' chief executive officer Joseph Anfuso. "Those who expect homes to fall another 30 percent in value aren't being realistic," Anfuso said Friday at his company's Valley Park neighborhood in southwest Manteca. "Home (values) can not fall below rental value."
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"Foreclosures are driving everything now," Anfuso said. He had originally expected the foreclosure wave to start subsidizing by the end of the year but now expects it to extend into the first quarter. "The amount of foreclosures has surprised me," Anfuso said.
From Of Two Minds:
"Prices likely won't increase if supply vastly surpasses demand, but they will only fall so far before hitting a natural bottom, he said. California's growth rate, rental rates, construction costs and income levels help determine that level, and O'Toole said he thinks some communities, such as Stockton, which leads the nation in foreclosures, might already be near the bottom."

This is like saying that your injury will stop hurting when the pain goes away. The mantra many others and I have been repeating is that home prices will fall until they are in line with income. But I realized that is, perhaps, a gross miscalculation which I must address. I have new hypothesis: Prices will fall below the level of median income support; they will overshoot to the downside and bottom at "market clearing" prices. The reasons are high inventory, high unemployment, scarcity of credit, scarcity of qualified buyers and poor sentiment.
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[P]rices will fall to market clearing levels and that level is not singularly tied to incomes. Even in normal markets prices oscillate around the mean. After such a great distortion (bubble) it is somewhat unrealistic to think that prices will fall right back to the mean.

27 comments:

smf said...

Rental parity is only applicable if the inventory is not excessive.

Too many dwellings for rent will spell disaster for many.

And let us recall that the population growth figures are estimates, often based on such figures as the # of houses built...

Jacob said...

The accelerated sales pace doesn't surprise Florsheim Homes' chief executive officer Joseph Anfuso. "Those who expect homes to fall another 30 percent in value aren't being realistic," Anfuso said Friday at his company's Valley Park neighborhood in southwest Manteca. "Home (values) can not fall below rental value."


Well a few years ago, people that thought home prices would fall (at all) were not being "realistic". Yet here were are, 45% down.

Home prices cannot be more than double, tripple or more than rents, yet they were and nobody in the biz saw a problem, or cared.

What happens as rents start to fall as well?

There is a bottom somewhere. Homes will not go to $0, but that doesn't mean we are within 5% of the bottom or 30%.

That jump in job losses is pretty scary. When will that peak?

Problem is, homes are in a freefall, lenders dont want to lend, and they cant anyway cause they are taking huge losses. The few people that want to buy may lose their jobs, or even if they dont, will find out that they qualify for a much lower amount than they would have even a year ago.

Rates are going up, and have been since 2003 or so, and without all the bs loan products, people now need a conforming loan, and a down payment...

I have been speaking with some realtors at open houses and they all confirm that the market below $250k is really hot. Many have had clients lose out on a bidding war. So maybe that range is close to or at the bottom. But what about the homes that are higher than that. They are starting to give.

And even when we get to the bottom then you get to wait around to 10 years before you start to see some appreciation...

RMB said...

Take a look at the long term price trend. Go to about 1997 and add 3.5% per year to the price (or multiply by 1.41) and you will get about the fair market value for the home. In the sac area that would be about 120k in 1998 going to 170K in 2008.

Patient Renter said...

"Home (values) can not fall below rental value."

Of course they can.

As always, it's sad the see the media quote such drivel without pointing out its inaccuracy.

Patient Renter said...

BTW, I like Peter Viles' breakdown of sales in relation to prices. He really has emerged as a good MSM source in a sea of mediocrity.

wannabuy said...

"Those who expect homes to fall another 30 percent in value aren't being realistic," Anfuso said Friday at his company's Valley Park neighborhood in southwest Manteca. "Home (values) can not fall below rental value."

Nitpick, the traditional bottom is when rent and owning,on a 15 year mortgage grants the owner a 7% ROI (excluding vacancies). We're a long way from that bottom! 7% ROI is huge! Don't miss the 15 year mortgage either...

I like Jacob's quip... We weren't realistic to expect 45% off... so expecting another 30% off must be crazy. ;) (Note: I'm not buying in Sac, just fascinated by the market.)

Oh, and as Jacob notes, rents are falling. If someone knows the floor to rents in an overbuilt market, please enlighten. I see no reason that Nationally we won't see huge rent drops. Too many FB's are moving back in with roomies or Mom and Dad. Not to mention the number of boomers who suddenly are waking up to the realization they are overinvested in real estate.

Got Popcorn?
Neil

sacramentia said...

He may be right that home values cannot fall below rental value. But if we are overbuilt and you have to factor in a 25% vacancy rate to be realistic, that doesn't mean that home values cannot continue to fall.

Did you see the PG&E deal to build the huge Solar facility? Some mfg in Rancho Cordova. The green energy boom is the real wild card. When and how big of a boom that will be could really change the outcome of RE over the next few years.

smf said...

"I have been speaking with some realtors at open houses and they all confirm that the market below $250k is really hot."

Driven by speculation, much like what developed during the bubble.

When that little side bubble pops, the recovery begins.

In the meantime, this game is not even half over.

Jacob said...

No doubt about that. I have read here and on other blogs how "investors" make up about half of that market.

So I try to get all the little pieces of info to see if I can piece together wtf is going on.

But the fact remains that if you want to buy a home for say $200k, expect a fight.

I do agree that eventually these so called investors (note I am not talking about the true investors that know what they are doing, I am talking about the people that watched a couple episodes of Flip This House and are now experts) will get tired of that falling knife cutting them up and will move on, then it will really get bad.

What happens when a bank lists a home at 75% the loan amount expecting people to bid it up, and nobody bids at all...

On a side note, I just got an email from a realtor and she seemed really worried that if I didn't buy soon I would regret it by next year. Always nice to have someone care about me... lol

Rich said...

I was at a Rocklin open house on the weekend, and the realtor told me that REOs were only 40% of the market in the area. I don't recall if he said sales or inventory, but in either case, I can't remember seeing a listing that wasn't an REO in the last few months.

Patient Renter said...

He may be right that home values cannot fall below rental value.

No, he's dead wrong. Home prices are partially a function of the availability of credit. Rents are partially a function of vacancies. Those two factors are completely independant of each other so the resulting home and rental values are at least partially independant.

Good examples where rents exceed home values are Detroit and Cleveland.

smf said...

Have 100 houses for rent and 50 families looking for a rental home.

What do you think will happen to rent/housing values then?

Deflationary Jane said...

Rents can certainly fall as well as house prices. People will double and triple up to keep eating for example.

We've covered this many times or at least SMF and I have. From an old 3-31-08 posting of mine:
'Renters are your most mobile workforce and the ones most likely to feel the effects of pricing pressure. They are the proverbial frog in the cooking pot.

You need wage increases to grow rents. Turn up the heat on rents and they double up _if_ wages are still slowly growing and living conditions are decent. But you get accellerating vacancy rates and a return to lower rents. That's a closed loop if you manage it right.

Remove wage growth and jobs and you have population flight. Increasing rents just exacerbates the the issue.'

Sometimes it just takes a while for the shock waves to register with Landlords. But oh do they scream like little stuck pigs when they realize whats happening to them.

smf said...

Plus 40% or so of houses that were sold were not ever occupied, hence they never had anyone that had a 'future renter' label on them.

Deflationary Jane said...

Exactly SMF. So much was built in 01-07 using growth rates from 96 to 00 that didn't materialize in 02-07. They built but the only people that came were speculators.

Smithfield said...

I no longer live in Sac, so I am taking a bit of a guess here.

Are most of the excess housing units in the overbuilt outlying areas which have already had huge hits? From what family tells me, the core areas are not seeing a huge number of for rents signs all over the place.

smf said...

Smithfield:

The outlying areas with new construction are the ones that are not doing well right now.

This applies to all price ranges.

Some lower income areas are also suffering from excess inventory, as their lower point of entry allowed many to attempt flips.

Built-up areas don't suffer much from excess, but they will suffer from price depreciation.

Cow_tipping said...

"Home (values) can not fall below rental value."

Even if this BS is true, and it definrtly is not ... what happens if rents fall. Say 25% vacancy in rental markets ... cos the renters all bought houses ... then duh ... rents fall, making more people live in overpriced houses that they "own" ... only to dum the depreciating debt trap back on the market ... and so on.
Cool.
Cow_tipping.

Cow_tipping said...
This comment has been removed by the author.
Jacob said...

So much was built in 01-07 using growth rates from 96 to 00 that didn't materialize in 02-07. They built but the only people that came were speculators.

Its strange, but I rarely here "experts" even mention the overbuilt factor. Even the most incompetant of shills must be able to do simple math, or hire someone.

We will get to a point when investors dont need any more homes, when the people waiting to buy do so, and the banks will still have a huge inventory with nobody to sell to, at any price.

Banks are already starting to capitulate, marking the homes low and taking what they get. So far they have been lucky in that people have bid the homes up, but that will last only so long.

We overshot the amount of homes needed to meet a ficticious demand based on cheap money and a huge amount of speculation.

The cheap money is already gone, speculators will leave eventually, then what?

sacramentia said...

You guys just don't think like investors so we keep arguing apples and oranges. The NOI (net operating income) factors in an appropriate vacancy rate for the area and all the other expenses associated with owning a home.

Jacob said...

I would wager that 90% of the current "investors" don't think like investors either, and would have no idea what you just said.

Diggin Deeper said...

45% is big number and receives lots ot attention nationwide, if not worldwide. Rather than reduce investor/speculator involvement I would think it encourages it as risk/reward ratios improve. It's all about time horizons and where we are in the present down cycle.

Overall, as we get closer to a bottom, the market's acting just like it's supposed to. Right or wrong...lower pricing will attract more buyers/investors as the market trys to reach a bottom.

Speculation?... maybe...all the factors presented here are valid and worth their print but the market will factor these in and price each home, in each area, accordingly...if it hasn't done so already.

Patient Renter said...

I would wager that 90% of the current "investors" don't think like investors either, and would have no idea what you just said.

Hahah, I'm with you Jacob.

smf said...

All these wonderful financial #s mean nothing at this stage if this problem is not addressed, and it frankly cannot be fixed:

'There is more supply out there than people that exist to use it all.'

Sure there are houses out there that may give an ROI right now, but no renter = no return.

Build 100 homes when 50 homes were required, and all homes will be affected.

Price, at this stage, is not even that much of an issue really.

Supply is. And way too much of it was built.

Not just homes, but condos (for those who couldn't afford a house), and rental units (for those 'priced out').

Diggin Deeper said...

"Price, at this stage, is not even that much of an issue really.

Supply is. And way too much of it was built."

Agreed...but hasn't the market baked these excesses into the current pricing levels over the last year taking all factors into account including rent and rental supply?

Imho, there's only one way the market can respond....through pricing. The greater the excess, the greater the price declines and Sacto leads the nation in that category.

STOP ROSEVILLE CRIME said...

If you have bad credit and can't buy a home, even at a "good" price, what do you do? Rent! I'd say rent value can certainly surpass home value especially since credit is extremely tight right now and unemployment is spiking.

Jacob, rents in the bay area are going down, explain that one.

On a side note, I just got an email from a realtor and she seemed really worried that if I didn't buy soon I would regret it by next year. Always nice to have someone care about me... lol

I heard this comment in 2003 from realtors. Come to think of it, I heard it in 2004, 2005, 2006 and 2007 also. To tell you the truth, I'm not really regretting it.