Tuesday, September 16, 2008

'A couple of years ago everybody thought they were rich'

From the Sacramento Bee:

Wall Street's meltdown is fast becoming Sacramento's problem, too. The three-headed monster gripping the financial markets Monday will put more economic pressure on the Sacramento area. Credit markets will tighten, which could hurt the fragile recovery in the housing market. Businesses will find it harder to expand. Pension plans might suffer. A lot of people will feel poorer and more afraid.
...
It's not just a psychological problem. The housing market crash has erased billions of dollars in wealth throughout Sacramento and the state. The latest problems on Wall Street – with the Lehman debacle coming a week after the bailout of mortgage giants Freddie Mac and Fannie Mae – are making things worse. "A couple of years ago everybody thought they were rich," said Chris Thornberg, head of Beacon Economics consulting firm in Los Angeles.
From the Sacramento Bee:
Inside their homes, residents are plotting against each other. They have attacked one another in legal filings, lodged complaints with the state attorney general and jousted at meetings. Two men – one disabled and one in his late 60s – even grappled with each other on another resident's front lawn.

The root of the tension lies in the depressed real estate market. An influx of renters into the 55-and-older development has angered homeowners, some of whom charge that renters have allowed underage people to live with them longer than is allowed. There's talk of teenagers and diapered babies in the swimming pool.

About 30 of the development's 136 homes sit empty and are controlled by a court-appointed receiver. Another 25 have been rented out by Sun Meadows' developer, Allen Warren. Outside investors also have leased homes to renters.
From the Stockton Record:
Foreclosures accounted for four out of 10 of the 4,419 single-family homes on the [San Joaquin County] market last month and made up eight out of 10 of the closed home sales, the [TrendGraphix] report said.
...
The median selling price fell again. The median selling price last month of $205,000 slid by $10,000 from July. The monthly median hasn't been that low since January 2002, when it stood at $200,000 countywide.
From News10:
San Joaquin County may be at the center of the nation's foreclosure crisis, but that hasn't stopped builders from putting up new homes. The Meritage Company continues to build in Lathrop, in a neighborhood called Riverstone.

It's surprising to University of the Pacific Prof. Dr. John Knight who teaches finance and real estate. "It's hard to understand, how the new homes can compete on a price basis, with the existing homes that are empty. It's very hard to understand," said Knight.

20 comments:

Cow_tipping said...

New homes will kill existing hoses in a market that is fast spiralling downward.
Everything costs less in a recession, land, labor, lumber ... and if we are deep in recession, the deeper the discounts. Recessions are great time to buy or build ... and if interest rates stay low, even borrowing is fine. Usually recessions are where people play with cash, and boom people play with credit.
Cool.
Cow_tipping.

firsttimehomebuyer said...

Amazing to me how people were buying homes that were so expensive. I know my income did not raise a lot; but than I was not in real estate. Now home prices are getting reasonable.

Jacob said...

A couple of years ago everybody thought they were rich

They thought they were rich, now they know they are not.

Foreclosures accounted for ... eight out of 10 of the closed home sales

Wow.

sacramentia said...

cow_tipping, most homes right now are selling below replacement cost.

Patient Renter said...

most homes right now are selling below replacement cost

And as you can see, the market doesn't care... though it needs to be pointed out that replacement cost is dropping.

inpd said...

"cow_tipping, most homes right now are selling below replacement cost."

Only in the outer laying areas like Elk Grove, Natomas, etc.
I got a home that sold brand
new in 2002 for $290K for well
under that price. The owners did
about $20K in upgrades after
buying but the carpet needed
replacing.

However, areas like Lands Park, East Sac are going to fall but it
will take longer. The people there are a bit more stable economically speaking and will hold out longer.

But in the end buyers (most of them)
will come to teh same conclusion I
did. Buy twice as much home for half the price in west Elk Grove
compared to Lands park and you still get a 10 rated school.

Diggin Deeper said...

Sacramentia...

That's a key point. Replacement values, at some point, ought to provide a floor to this market. That said, if cow tipping is correct, and costs deflate due to lack of demand, then replacement values will also deflate.

The upside is that unless world markets depress dramatically, one could make a case that commodities have over corrected and will be pressured up due to demand outside the US. That would firm up the material side. As for the labor, how much lower can it go?

While demand destruction is happening, keep in mind that the saying "the cure to high prices is high prices" is equally true in reverse.

Sold in '05 said...

DD,

Have you seen the world markets this week?

The illusion that the rest of the world would be fine when the U.S. crashed has been throughly wrecked. Russia can't even open it's markets and China's stock market has plunged over 50% since the golden days of last year. In the UK they are worried that their own mortgage companies are about to implode. There are very few places that look to be in better shape than the U.S. now.

I don't think we will see housing commodities rebounding anytime soon.

CD

Diggin Deeper said...

Sold in '05

The thing that bothers me is that we're spreading our mess out to the rest of the world, and they're starting to balk at our problems.

In Singapore people were lined up at AIG pulling their money out of the company. The Primary Fund (a 30 year MM fund) with $65 Billion in deposits has delayed redemptions for a week and is quoting .97 to its customers. All this due to the Lehman BK.

The TIC report just came out yesterday and it showed that net flows of treasuries bought by foreigners was negative $75B. Not a good sign if we're going to continue to finance our debt to the tune $85-90 B per month.

I beginning to think the reverse is true...the world is beginning to see just how bad the credit / financial system is in this country.

smf said...

The thing that bothers me is that we're spreading our mess out to the rest of the world

No, greed and stupidity are universal and not nationality dependent.

Plenty of people around the world thought their place was 'special' and created bigger bubbles than were created here.

Was there not a story as to how an apartment in India that was bought for $800K could only be rented for $800/month?

You all need to realize that a lot of these booming economies around the world were built on the housing bubble here. The popping of this bubble has already popped the bubbles in other developing countries.

And each of these countries created their own bubble.

Just read about Dubai.

Diggin Deeper said...

smf....

We are exporting financial crisis across the world right now. Our markets remain somewhat liquid while others like Russia have completely seized up. The facts are clear, the US financial system crafted toxic debt and then pawned them off on the world as AAA credit...and the rest of the world is getting kind of pissed!

Whether or not there were bubbles elsewhere is a given. But they really don't affect us like this partcular problem is affecting us and the rest of the world.

And Sacto real estate doesn't really enter onto the screen until the dust settles and we can freely get credit competitively again.

Patient Renter said...

The thing that bothers me is that we're spreading our mess out to the rest of the world

quoting .97 to its customers. All this due to the Lehman BK.

The interconnection of it all is starting to make it look like one giant global house of cards.

Just read about Dubai.

Well Dubai has a real industry to fall back on (at least until 2015), but it's still more than we have. The idea that the US has the market on innovation cornered and that our economy can be driven by innovation is just arrogant. As current events are showing, "innovation" isn't always a good thing.

And Sacto real estate doesn't really enter onto the screen until the dust settles and we can freely get credit competitively again.

That's a good point. It's interesting, incredible and somewhat terrifying how much damage has been wrought by one simple false premise - that housing prices will always go up.

smf said...

DD -

I guess it becomes a 'chicken or the egg' issue as to the toxic financial instruments that were created.

If they prices had not skyrocketed, they would not have been misused and vice-versa.

I would simply say that whoever created this mess is beside the point at this time. Since EVERYONE played the game, everyone will fill the effect.

sacramentia said...

If homes are selling below replacement cost it is an awful time to build.

In east sac and other areas where there aren't any vacant lots, I count replacement cost = fixer demolished + new construction.

In addition lot prices trail the market and building takes about a year, so you will have compounding losses.

In the same way that tract homes selling for 3x cost was irrational on the way up, homes selling below cost is irrational on the way down. The market is irrational most of the time, and PR I agree that it does not care.

In some areas, the market has really over-reacted and homes are for sell for well below replacement cost and at price points that produce cash flow large enough to sustain the likely 3yr deflation scenario and still break even.

Jacob said...

Homes priced well, or below market are getting a lot of activity, multiple bids etc.

I suspect homebuilders will continue to build so long as they can sell for a profit, or at least break even. As costs go down their target sales price also goes down, plus there will always be some market for people that want a brand new home.

But I think replacement costs don't matter that much when you look at how much excess there is, and also how hard it is and will continue to be, to get credit.

With all these banks going under, who will continue to lend money?

sacramentia said...

"But I think replacement costs don't matter that much when you look at how much excess there is, and also how hard it is and will continue to be, to get credit."

This argument is just non-sense. Replacement cost vs. sales price will define the change in supply. We are absorbing the excess right now but replacement cost is as important as the rent prices. Credit is going to be tough for a while, not impossible, just tough.

Jacob said...

Well I probably just don't understand the significance.

I mean if a home is selling for $150k, but it would cost $200k to build the same home how does that effect anything?

Certainly it makes it a better deal to buy the already built home, but how does that help the supply issue?

smf said...

You are using bubble pricing to figure out replacement cost for a house.

During the bubble, all commodities were going up in price by very significant factors.

This was all built in to the price of the house.

But much like with the price of oil, it will all head down soon enough, and a future house will be built much cheaper than a house right now.

Of course, it must be also understood that sometimes it is far better to get some money for your house than none at all.

I doubt builders will make the same mistake that others who are not going to 'give their house away'.

Diggin Deeper said...

"But much like with the price of oil, it will all head down soon enough, and a future house will be built much cheaper than a house right now."

Hasn't that already happened? Aren't prices for raw materials much cheaper today than they were 6 months ago?

RV6Flyer said...

"Hasn't that already happened? Aren't prices for raw materials much cheaper today than they were 6 months ago?"

SMF, but aren't building material prices pretty sticky?