Thursday, December 03, 2009

Sacramento Real Estate Market - December 2009 Water Cooler

Post off-topic links, observations, and stories about the Sacramento real estate market here. Please read the comment policy before posting.


husmanen said...

Rental saga ... continued.

My LL arrived unannounced last week, spoke to her about the NOD and she said she got a mod.

So, trust and verify, I called in a couple of favors and they didn't have any updated info. Then I called the servicing company and stated my address and wanted to know the status of the loan. I gave them the TS number, they checked and confirmed it has been closed. I restated that it is no longer in pre-foreclosure and they said yes.

That buys us some time and makes things less complicated as we will not be forced to move, rental or ownership.

Interesting thing though, the loan servicing company never asked for any confirming information on who I was. I just stated I want to know the status of the loan on the house.

patient renter said...

Well that's certainly good news regardless.

wilk916 said...
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wilk916 said...

Hello all. I just discovered this forum and read through the last 30 days of posts. Interesting stuff very much aligned with my own thoughts. Wife and I are on the house hunt in Folsom/Fair Oaks/Granite Bay. We have 20% available for the down payment but I'm still on the fence regarding whether this is the best time to buy. We're focused on short sales at the moment because we are tethered to the bay area for another 6 months. Anyway, any/all suggestions are helpful.

patient renter said...

It's becoming more debatable whether now is a good time to buy. It's generally agreed amongst us that prices will fall some more, more so in the upper end than in the low end, and that interest rates will also rise. But it's anyone's guess how much and how fast prices will continue to fall and rates will eventually rise.

One thing that is for certain is that the market is heavily manipulated right now. Banks (and the government) are sitting on loads of inventory and rates are being subsidized. This is enough to keep me out of the market until things resume normalcy, but some people aren't as concerned... each person's situation is different.

wimpyVO2max said...

wilk916: If low rates are important to you then I would not wait. The Fed has said it will stop its mortgage subsidies by March 2010. These 30-year rates below 5% will not last very long.

If a lower price is more important, and don't mind financing at a higher rate, then waiting might be best.

slow burn said...

The higher the interest rate, the lower the price of homes will go.

It's always better to buy at a higher interest rate because you can always refinance when the rate goes low.

It's not always possible to lower the mortgage payment. I think once the housing inventory that the banks are hiding gets exhausted and the bubble has completely deflated, banks won't be as willing to lower the mortgage amount like they are for some people.

RV6Flyer said...

"It's always better to buy at a higher interest rate because you can always refinance when the rate goes low."

I would be careful with that statement. We are close to ending a 29 year period of declining rates, which was preceded by 27 years of steadily increasing rates.

From the end of WWII to 1981 home prices rose on both a real and nominal basis. During this same time 10 year treasury yields went from 2.29% in 1954 (this also happens to be where we were a few days ago) to 15.32% in 1981.

I think your words of wisdom would have failed miserably in that 27 year period.

RV6Flyer said...

Wilk916 - My advice is to pick a modest home in a well established neighborhood of (preferably) custom homes.

Buy only for the long-term and only buy if it meets all your criteria. There are a lot of great rental homes out there if you do not see yourself in the area for a long haul.

husmanen said...

wilk916. Rental parity is my key metric, however it has a great weakness (the general economy).

There are areas of Sacto that buying is below rental parity, it is a hot market with a number of investors. These areas will find their economic fundamentals much faster than other, e.g. the areas you mention.

You are looking at the mid to upper end areas, they still have a ways to go to get to parity. Especially as rents fall.

Besides the high price with low interest rates, your tax rate is based on purchase price, with Prop 13 that can make a huge difference in the long haul.

Higher interest rates also mean higher deductibles at tax time.

Higher interest rates usually also mean lower purchasing price, which even if you plan to be their forever 'life can happen' forcing your hand. A lower principle loan is easier to get rid of than a higher one with a good interest rate, basically upside-down.

What I would like is a future price, say 2011 now. That way I can benefit by low interest rates and a low principle balance.

Overshooting the bottom has occurred in every boom/bust period. At least with housing it doesn't turn on a dime like the stock market, slow and steady.

husmanen said...

Also, forecasting the housing market is much more difficult now. In 2005, it was like shooting fish in a barrel. Now things aren't as extreme.

However, we have had unprecedented government intervention (interest rates, bailouts, increased FHA loans), banks withholding large amount of inventory (before NOD status) and a very tough recession.

Rental parity and price-to-income in the mid and upper end are still out of whack. Either incomes increase or prices need to fall into line. I am betting on the prices.

wilk916 said...

Thanks. It seems everyone (most) are convinced rates are going up in the near term due to the Fed halting the purchasing of MBS/treasuries. Why are you so convinced this will end? Is there enough political pressure to keep this policy from being renewed. Seems like Bernanke will remain for another term.

husmanen: 2011 prices at today's interest rates would be great indeed!

Any thoughts on when we will start seeing this looming inventory of homes that banks seem to be sitting on hitting the market? I hear/read national commentary about a huge supply of homes that will eventually come to market but I wonder what the real situation is locally (i.e, the areas I am looking). For example, is there data available detailing the number of local properties seeking loan mods or are bank-owned and sit empty?

Another question: With BoA paying back TARP funds (and presumably regaining greater independence from gov't manipulation), what is the chance that this greases the wheels for BoA (and other soon-to-be TARP repayers) to reject loan mods requests and process foreclosures at a faster rate?

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

"One thing that is for certain is that the market is heavily manipulated right now"

Yup, with the mortgage industry having been quasi-nationalized by the Fed Govt with Fannie, Freddie, and the FHA writing most of the loans, the banks have no incentive to loan money to the public. They borrow from the Feds at 1/2%, and buy longer dated Treasury bonds with a 3.25-4.25%. Why risk loaning to someone who can stiff you if they don't like the equity numbers after owning their property for a year?

The FDIC keeps watering down the regulations for re-capitalizing bad debt. It's at a point now that banks can hang on to their foreclosures indefinitely without penalty. Japan's remains a good example...they've got 20 years of recession to show for it and property values that have stagnated over that period. Suspect the new FASB 167 and 168 rules will either get delayed, or washed out completely in January. Too risky in a fragile economy.

RV6...I'm with you on rates. Rumor on the street is that Japan would like to sell us back some longer dated paper...that had better not fly or long rates would surge overnight.

Could it be that the days of all those foreclosures hitting the market are over???? Seems like the only properties on the market are short sales. I guess it's better to lose a 1000 banks over a 10 year period than to lose them over 1-2 years. T

Jacob said...

It's better in the long term to let the banks fail and let the market crash, get to a solid bottom and build up from there.

Or we can have a slow decline for 10-20 years. See Japan or the Great Depression.

But that seems to be the way things are going.

I am feeling less and less like buying over the past year. Too much manipulation and fraud. Add to that, CA is broke and won't make the hard choices to actually fix the budget, just accounting gimmicks that delay the problem.

How soon until we just raise property taxes or rename the tax as a fee or whatever.

As for lower rates / higher price vs higher rates / lower price I am definitely in the group that wants higher rates and lower prices.

Who knows what will happen in the future but with a lower price and higher rate, if rates go down you could refinance, if rates go up you would have a lower rate locked, and if you wanted to the principal would be easier to pay off.

Also if you buy when rates are low and need to sell when rates are high, that would put pressure on your price.

We definitely shouldn't allow the government to loan money to banks at .25% and let the banks buy securities from the government that pay a higher rate. I suppose that game can continue for a while, but not indefinitely.

Job losses and unemployment / underemployment are still a huge problem and will be for years. Excess inventory will be a problem for years.

Deflationary Jane said...
'The city faces a 15% unemployment rate, a depressed real-estate market, rising retail vacancy rate and a budget shortfall that is expected to hit $30 million for the next fiscal year.'

We hit 15%? ouch! Didn't some GS, aka the squid, analyst just come out with a prediction that the nation wouldn't have any UE improvement until the end of 2011?
Yep, that sure makes me want to invest in rentals.

Diggin Deeper said...

If you don't plan on living in your home for a decade or more, chances are pretty good you won't see much appreciation. Anything less might be considered short term.

But the rates issue is definitely a deal maker or breaker along the way. Housing prices will have to stabilize, even in a rising rate environment. The Feds are counting on this, and failure to acheive some sort of manageble inflation is unnacceptable. Continued deflation would be an unacceptable and not the intended consequence. The fallacy is that these airheads really think they've got control.

Personally I'd like to see the "assumable" loan come back. It would go a long way to protect the homeowner should rates rise dramatically in the future. It certainly would be attractive if you ever had to sell your home in the future. It's probably too early see these pop up but if rates start rising, who knows??

James said...

"Personally I'd like to see the 'assumable' loan come back."

Seriously, can you imaging the value that would add to a home down the road if inflation ever does take hold? I am not positive, but I thought FHA and VA loan were assumable; and with so many FHA loan being underwritten, this should bode well for many.

"Housing prices will have to stabilize, even in a rising rate environment."

YES!! The idea that prices will fall as long as rates go up is simply ignorant thinking. Though I do believe rates will stay low for a couple of more years and prices have not yet started to recover. At some point during that time there will be a sweet spot to purchase.

husmanen said...

James. "The idea that prices will fall as long as rates go up is simply ignorant thinking."

Could you bring some data on this? If prices won't fall if rates go up, why is the government spending billions to support a very low interest rate?

Most people buy based on monthly cost and pay based on income, a big reason the bubble became what it did because of the 'exotic' loans that allowed an unrealistic monthly cost, not based on income fundamentals.

When the interest rate goes up, the monthly cost goes up, assuming everything remains constant. Something has to give, not insurance and definitely not taxes.

There will be a 'sweet' spot, but it won't be hard to miss, long and wide.

sacramentia said...

"If prices won't fall if rates go up, why is the government spending billions to support a very low interest rate?"

They would, but the Fed is up against the zero bound and is still trying to inflate. My bet is that rates are going to be very low for many years and that the economy will grow before the Fed raises rates - unless different leadership takes over at the Fed.

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

U.S. Treasuries’ Biggest Overseas Buyer May Sell

"Japan has been this year’s biggest buyer of Treasuries, which means it has done more to help finance the widening U.S. budget deficit than any other country. Its holdings have risen by $125.5 billion, according to data compiled by the Treasury. "

Even if this proves to be nothing more then a rumor, there's a good chance the Japanese won't be buying more treasuries either. With their debt to GDP running as high it is, selling bonds would be one way to pay down some pain.

Using the 30 year bond as an example, rates have been range bound between 4.15% and 4.40% over the last couple of months. Any meaningful break out, with a close above the 4.60 level, would be good sign that mortgage rates have likely bottomed and that higher rates aren't far behind. This all could take awhile, but with $1.5 Trillion in US budget deficits, and an additional $2 Trillion in US debt refinancing in 2010, the risk is pretty low betting on higher rates in the near term...

"If prices won't fall if rates go up, why is the government spending billions to support a very low interest rate?"

Hus, could it be that banks need low rates in order survive, and the consumer doesn't really have a priority stake is what the Fed's doing?

husmanen said...

DD. You might have a point there with regards to the unintended consequences of supporting the banking sector. The banks have access to very cheap money, they get it and then invest into treasuries at higher rates. Maybe another reason why there has not been a lot of inflation given the potential increase in the money supply.

Diggin Deeper said...

Why Treasury Needs a Plan B for Mortgages

"AFTER months of playing pretend, the Treasury Department conceded last week that the Home Affordable Modification Program, its plan to aid troubled homeowners by changing the terms of their mortgages, was a dud."

The banks are temporarily in a "no lose" position by moving foreclosures off the balance sheet. This can only last until the carrying costs, due to ever increasing failed inventory, rises high enough to force the bank into insolvency.

RV6Flyer said...

Hus - It is called the velocity of money, which is measured by dividing the nominal value of aggregate transactions by the total money supply.
With everyone tightening up and increasing savings, banks not lending, and the majority of stimulus money not being deployed, no inflation will happen. If Bill Gross is correct on the new economy, I think we will see lower rates before we see significantly higher rates.

On the higher rates, lower home price argument....forces causing the numerator of the velocity equation will come as a result of a strengthening economy, which will add support to housing. The rebound in prices will be tempered by increasing rates.

I suppose holding all other variables constant and taking interest rates to the max, one will find the limit on housing prices. This limit will be when most individuals and simply purchase with cash, similar to Venezuela. There are, however, many more factors to consider than just rates.

As the previous post stated, it would be naive to assume increasing rates always result in decreasing prices. If you do not agree, explain to me why home prices increased from 1954 to 1981 in the face of steadily increasing mortgage rates.

Short term spikes in rates can have a negative impact on asset prices, but over a longer period, it will not create steadily falling home prices.

wilk916 said...

DD Posted:

From the article:

"But doing nothing also has hazards, the most obvious being continuing foreclosures, which nobody wants, and further declines in real estate prices that will hurt homeowners as well as investors."

Nobody? I know of a few people, including myself who would love to see these foreclosures be processed and a bottom finally in place for the market. Those who were prudent savers during the bubble and didn't over extend themselves *should* be rewarded. Should be survival of the fittest -- not the greediest.

patient renter said...

There are, however, many more factors to consider than just rates.

Indeed, like incomes and rents.

it would be naive to assume increasing rates always result in decreasing prices

I'm not sure that anyone ever assumed that, but certainly an increase in rates will bump prices down from their current support levels.

Diggin Deeper said...


Great post! Thanks for putting it into layman's terms...What I takeaway here is that we're de-leveraging approximately 60 years of world credit expansion and trying to do it in a couple of years. Under the present scenario, this is not possible imho.

One of the other variables you mentioned that I would consider, is the purchasing power of the USD. The dollar has lost approximately 17% over the past year. The DXY briefly touched .89 at its last peak and then dropped to the .74's lately. While most agree it's oversold at this point, fiscal mismanagement, burgeoning debt, past debt refinancing, and unfunded liabilities do not create an atmosphere for sustained strength in the future. In fact, a strong dollar lengthens the time in which we can pay down our debt.

As the dollar falls, it should begin to affect the price of RE. My wife and I are toying with building a home on some property we own vs. buying the home we're in. We can't build near the home we can buy at this point. Material prices alone dictate that we're better off buying. As the dollar loses value that spread widens as our purchasing power diminishes. I can't help but think there's a brake point, where RE prices begin to reflect the lack of purchasing power the USD presents. Given the fact that the inventory is being controlled, and parcelled out drip by drip, this further adds to price stability. The weaker the dollar gets, the less home the dollar builds, and eventually the less home a dollar buys...

Diggin Deeper said...

Government 'Out of Bullets,' Consumers in Trouble: Whitney

"What's so frustrating is you have an administration that is arguing such a populist (ideology) and not appreciating all the unintended consequences that the consumer and small businesses have far less credit," Whitney said.

No jobs = no consumers = no recovery

husmanen said...

From what I understand most Americans move on average about every 5-7 years. This means you should be concerned about rates, especially if they appear to be at an all time low/bottom.

If you buy a $400k house now at 5% with 20% down (PITI $2200/Month) then sell in 6 years when interest rates are at 7% (historical average is higher), that is a 2% increase in interest rates. People purchase on affordability of monthly payments. This could happen:

(1) Keep payment the same – PITI $2,200/month. To keep the monthly payment the same you have to sell the house for about $330k, i.e. a 2% rise in interest rates decreases the value almost 20%. Basically you have to lower the price to find a buyer that is in the same income bracket. Assume incomes stay flat. Not good.

(2) Assume 3% annual inflation and incomes keep up, not likely but for arguments sake, 6 years AND interest rates increase from 5% to 7%. Also assume you bought at rental parity, an adjusted PITI would be about $2,600 per month. That puts you at a real selling price of $400k, same as purchase price 6 years previously. Not good.

(3) Assume you want $477k, inflation adjusted over the 6 years. You need a buyer that can afford a $3,142 monthly payment. With 30% of gross income going to PITI you need a buyer that makes nearly $150k/ year, this tier is not that large, i.e. fewer buyers. Not good.

Historically interest rates have been higher than today, going lower doesn’t seem like a possibility, higher is probable, just when.

Those were just a few scenarios, there are countless others. Putting it down in black and white with some assumptions makes the decisions easier to get your head around. Some areas may have hit a bottom (lower end/rental parity) but all will be impacted by interest rates.

Rental parity will still remain as a metric whatever the interest rates. Plug in some numbers with various interest rates over 3, 6, 10 years, see if it makes sense.

Right now the mid and upper areas appear to be a gamble if/when interest return to their norms.

Diggin Deeper said...

New Obama plans: 'spend our way out' of downturn

Uh...smells like a new stimulus plan has just been unveiled. Now for the smoke and mirrors on how it won't cost us anything.

RV6Flyer said...

husmanen - Again, you constraining your assumptions to one--interest rates.

What about the following:

1) Wage growth. Rates will not be increased until we see an improvement in employment. Your model only assumes an increase in assets prices due to inflation and a corresponding increase in rates.

Let us assume 3% wage growth to coincide with your inflation estimate. That $400M house with a PITI of $2600 requires a $104,000 household income. After 6 years with a 3% annual increase in wages, the same income would increase to $125,000. This buys a little more home.

2) Increase in rents. With an improving jobs situation and 3% inflation, it would general be agreed that rents will increase. This changes your rental parity as well, thus putting upward pressure on home prices.

3) Increased savings. Americans are paying down debt and saving more than we have in many years. 6 years from now, individual balance sheets could look significantly improved. This may result in higher down payments or greater capacity to service mortgage debt.

Back to the $400M house. Today it is purchased with 3% down, or a $388M mortgage and $2082 P&I at 5%. In 6 years, the appreciated home of $477M is purchased with 20% down, or a $381M mortgage with a $2534 P&I at 7%. This is a 21% increase in monthly payment, but our borrower's income also increased from $104M to $125M, or about 21%.

4) New loan products. Portable loans--these were popular during previous rising rate scenarios. The borrower locks in today at 5% for 30 years and can transfer the loan to any number of new properties and keep the rate fixed for the entire term.

Assumable loans. The person who purchases the $400M house today at 5% sell the home and mortgage to a new borrower at the 5% rate. On a DCF basis this will add intrinsic value to the home if rates increase.

5) And the most likely...interest only loans and ARMS make a huge return to the market.

This of course will allow borrowers to take on greater obligations and support home prices.

I could go on for an hour with additional assumptions that need to be considered, especially buyer psychology. Point being, pricing a a house is not like pricing a 30 year AAA rated bond. A 2 % increase will not result in a 20% drop in home values. Think of the housing market more like the junk bond market. A rating increase from Bbb to A will have much more of an impact on prices than a 2% increase in rates.

RV6Flyer said...

"As the dollar falls, it should begin to affect the price of RE."

DD, so very true. Just look at copper or random length lumber futures, both hitting recent highs. If the DX gets a 60 handle on it, I don't see how anyone could justify building.

Also with municipalities needing more money, they might keep increasing permit prices to the point where it will push people to existing homes.

husmanen said...

RV6. Yes there are endless assumptions and each must fit a personal scenario. I personally don’t see Wage Growth nor Increase in Rents in the near future. The data and personal experience support these assumption, although this may change. Increased saving has occurred, but I am not convinced this will be used for a down payment, especially as I don’t assume large increases in wage/job growth.

Counting P&I only can be misleading as the total nut is what is required, Principle, Interest, Taxes and Insurance, the last two may see increases. Also, you have to pay the entire amount and then get a deduction.

Assumable loans can increase the intrinsic value, but the loan could be higher or equal to the value, especially if a FHA loan is used. Risky.

Interest only loans and ARMS have existed for sometime, it was those who qualified to use them that changed. Not sure if they will come back as before, then again I did not think FHA would be the new subprime either.

We could go on for a long time with different assumption, I see the mid and upper end and very high risk at current prices with a lot of downside possibilities AND a lot of unknowns, thus increasing risk.

smf said...

What is missing from most people's assumption as to house costs is MAINTENANCE and repair.

When you purchase a new home, the maintenance costs are minimal, though for a bigger home the utilities cost can be significantly higher.

I have owned both old and new homes, and maintenance costs were incurred for both. In our current 20 year old home, required repairs will soon get into the 1000s of $$$.

All these landlords will soon learn that even a minor repair can wipe out the yearly profit from a rental.

Deflationary Jane said...

From Home Front's piece on the CB Ellis forecast:

* Land: Commercial land development will almost stop as commercial users take their pick of cheap vacant space. With so few commercial land sales, it's hard to even define prices.
* Apartments: Rents will fall still more with rising unemployment and a plentiful supply of single-family homes for rent. Apartment owners with heavy debt will fall, making 2010 "a buyers market, bringing "contrarians off the sidelines."

Yup... rents down, CRE at a stand still. Maybe it's time to sell some of that CRE to be converted to live/work?

Diggin Deeper said...

That's a great idea! But most bubble era CRE would sell at a loss and those numbers, compared to residential, would really bind up the banks. If you average a $100K loss on a bad home loan, the loss on the commercial could run 10 times that or more. It's more likely commercial gets "swept under the rug" in order not to have to recapitalize loan reserves...Tomorrow, tomorrow, tomorrow, seems to be banks mantra right now...

I read somewhere recently, that nationwide, local and regional banks hold approximately 70+% of their loan portfolios on the commercial side. While they're not as exposed to the residential side, a couple decent sized foreclosures on CRE can easily capsize the bank. It's probably why we're seeing ratios of bank failures run so much higher on this segment we do on larger institutions.

husmanen said...

The PWC report on Emerging Trends in Real Estate for 2010 is out. You can go to PWC website and register to get it or you can use Patrick's site below:

It is full of interesting tidbits about Sacto/CA,e.g.

Pg 29 "Relative sentiment for California cities, including San Diego and Sacramento, falls over concerns about government gridlock, rising taxes, and an inhospitable business climate."

Pg 29 Sacramento near "Abysmal" in the Exhibit 3-3 US Markets to Watch: For-Sale Homebuilding

And the market in general:

Pg 5 Not a pretty picture, Exhibit 1-1 US Real Estate Returns and economics Growth.

Pg 7 Exhibit 1-3 Inflation and Interest Rate Changes. Inflation and interest rates to moderately increase.... "and it all means 'real estate recovery will be slow'.

There are plenty more, it is an interesting read.

Jacob said...

Taxes are a big concern for me for buying in CA.

CA is in a jam and the legistrature will not make any of the tough decisions. Just kick the can down the road a few more months with accounting gimmicks.

If you chart out tax% vs state revenue it would be a curve and the stat would get 0% at each end. If you tax nothing you get nothing and if you tax 100% you get nothing cause nobody works.

I think we are at the peak of what the state can get in terms of revenue. Raise sales tax and people buy less, raise taxes on businesses and they move out of state, raise taxes on property and the overall price goes down.

That said, I am pretty sure CA will raise taxes (or fees) instead of making the cuts they need to make. And it will just make the problem worse.

But what happens when you buy a house and then the next year Prop 13 is repealed. Will it happen? I dunno, but if enough people lose their homes they will be more than happy to vote for it I'm sure.

UrbanSpiceComany said...

"instead of making the cuts they need to make."

But thanks to the initiative process, most spending is mandated and can't be easily cut. The headless majority should not be making law.

Jacob said...

Well that is part of the problem, we should be able to mandate spending but for every dollar we spend we need to have some fee attached to pay for it.

No more of the sell bonds to pay for everything forever.

Diggin Deeper said...

States can mandate new taxes and fees, but they can't mandate growth.

Add it up:

1. We have officially 6-7 million people out of work. When you add in those that have quit looking, hold a part time job, have fallen off unemployment assistance, etc, the BLS unemployment figure jumps from 10% to 17.5% or just under 1 in 6 unemployed or under employed.

2. Consumer credit has fallen for 9 straight months and is down by $300 Billion over the period.

3. Commercial and Industrial credit continues to fall indicating business are contracting regardless of all the recovery noise.

4. Average American household debt is estimated to be 130% of disposable income. If people have jobs, they're not spending as much, they're saving and working down their debts.

Growth comes when 82.5% of the working population spend more of their disposable income, to equal the lost spending of the 17.5% that are un or under employed.

Not happening. With Americans saving more, just the opposite.

No jobs No consumer No recovery

husmanen said...

Athough I don't forse much of a rise, this could be the first sign of an upward change in interest rates:

Sac Business Journal.
Mortgage rates rise from all-time low

Too early too tell but things are a changin'.

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

Hus...Bad 30 year auction yesterday...pundits say it's seasonal, but the bond market tells it like it is...

Diggin Deeper said...

U.S. Foreclosures to Reach 3.9 Million in Second Record Year

"Three California cities had the highest foreclosure rates among metropolitan areas with populations of 200,000 or more. Merced led, with one in every 83 households there getting a notice, five times the national average. Stockton was second at one in 85, and Modesto was third at one in 87"...

"Riverside-San Bernardino and Bakersfield, both in California, ranked sixth and seventh; Orlando-Kissimmee, Florida, was eighth; Vallejo-Fairfield, California, ranked ninth; and Sacramento came in 10th, said RealtyTrac, which sells default data collected from more than 2,200 counties representing 90 percent of the U.S. population."

Pretty ugly...and more on the way...

And on to CRE and corporate debt...

The Coming Wave Of Debt Defaults

"Meanwhile a big chunk of recent defaults remain disasters waiting to happen, since they've been papered over by "extend and pretend" refinancings, amendments and waivers. About a third of those defaults have resulted in distressed exchanges, and only about a quarter have led to actual bankruptcy filings. This reflects the natural desire among issuers to buy time and fight another day, and the strong preference among lenders to avoid a loss or the hassle of taking control."

husmanen said...

Yesterday was the deadline to pay the annual property tax in Sacramento County. I have collected data on some a specific area of Folsom for three tax cycles (Dec2008, Apr2009 and Dec2009) and the number initially delinquent have increased dramatically.

I say initially because historically over 50% cure their payment with penalties and/or the County has a lag in updating the data. I did call the county and they said the data is updated as of today.

My findings for Dec2009 show an 80% increase in the initial number of homes that are delinquent. Delinquency can occur for a number of reasons, (1) not paying your mortgage and your escrow account does not match county expectations (2) those not using an escrow account are just late (3) the County is late in processing and updating their databases (reassessing property values can also cause a wrinkle, but this area does not have many homes purchased in the last four (4) years). There are probably more reasons.

Although a microcosm of the market, I believe this lends credence to the ‘shadow inventory’ issue and a potential ‘shadow inventory’ flag/identifier. If you don’t pay on your mortgage, and the bank ignores this for a variety of reasons, the escrow account to pay the taxes is not filled. The county does not accept partial payment, payment has to be what is expected. If you don’t pay for six (6) months trying to do a loan mod, the county still expects to get paid the exact same amount.

The last caveat is that it takes five (5) years of not paying your taxes before the County puts a lien on your house for sale. Of course, you accrue the 10% penalty.

Giacomo said...

Jacob said: "As for lower rates / higher price vs higher rates / lower price I am definitely in the group that wants higher rates and lower prices."

I agree, I think that's smart. And I'm wondering if that isn't becoming the prevailing attitude among potential buyers (or put another way, will the supply of buyers inclined to buy on tricky incentives and artificially-low interest rates be running out here pretty soon?).

sacramentia said...

Is there anywhere in CA where this statement is true?

"My neighborhood is actually holding in value over the last few years."

I don't think so...but I just heard it again so I'm throwing it out here my favorite real estate analysts.

Diggin Deeper said...

"My neighborhood is actually holding in value over the last few years."

Maybe in a very high end exclusive beachfront neighborhood?...

Giacomo said...

"My neighborhood is actually holding in value over the last few years."

We sold our last house in Pasadena, summer 2006. It just re-sold this summer 2009-- for just 9% less. In that time, it got a new roof and a re-modeled kitchen, but still...pretty amazing, all things considered.

My parents live at the beach, relatively modest place. Not much turnover in their neighborhood, but judging from the few sales, prices only fell slightly after the crazy times of '05 - '06.

Jacob said...

I would expect some places to hold up their values. A really great / desirable location. A place with custom homes. A place with a low amount of inventory.

That said, the 99% of homes that are in cookie cutter developments are screwed.

RV6Flyer said...

"My neighborhood is actually holding in value over the last few years."

I would argue for my neighborhood of East Sacramento, it has held up much better than I anticipated when compared to the regional numbers. I am confident I could still sell my house for what I paid a year and half ago--though we have done a few improvements and we were able to haggle for a month and get 9% below listing.

Deflationary Jane said...


You'd be surprised at what cash does when negotiating in your neck of the woods *8evil grin**

smf said...


Have any of you bothered to look at the high end lately?

It is not good, and it won't get any better.

In other news, or neighbors in a very good Gold River area lost their house...due to HELOC abuse.

smf said...


Have any of you bothered to look at the high end lately?

It is not good, and it won't get any better.

In other news, or neighbors in a very good Gold River area lost their house...due to HELOC abuse.

RV6Flyer said...

DJ, I am very jealous of your position. There are some wonderful deals to be had on a some of the short sales.

patient renter said...

A really great / desirable location.

If something is desirable now, it was probably desirable before the bubble. Absent some other change, a bubble is a bubble.

Diggin Deeper said...

"If something is desirable now, it was probably desirable before the bubble. Absent some other change, a bubble is a bubble."

Which probably says that some locations didn't experience a bubble in the first place. A 10% correction in pricing is nothing compared to what we've seen. But is this correction over? If not, there's no guarantee that if the mid-upper end ($500K+) falls off a cliff in '10, it won't drag down those homes sitting in the "cut above" areas.

2010 should be a very telltale year for real estate. With jumbos, alt-a, and stated income mortgage resets on the horizon, unless there's real structural improvement in the economy, it could get interesting. Interwoven are the other markets that will affect sentiment one way or the other.

I'm hopeful 2010 is the bottom, there's just very little conviction we've seen the last of the deleveraging that needs to occur...

Diggin Deeper said...

Dan Walters: California debt may be half a trillion dollars

"The latest annual pension report from the state controller covers 2006, when the unfunded liability was $64 billion. But since then, state and local pension funds have lost at least $150 billion on investments, so a reasonable estimate of today's unfunded liability is $200-plus billion. A state commission, meanwhile, says the state-local liability for retiree health care is about $100 billion."


wilk916 said...

Newest in series from CalculatedRisk:

"Total sales in November were off 16.1% compared to November 2008; the sixth month in a row with declining YoY sales.

On financing, over half the sales were either all cash (26.4%) or FHA loans (31.4%), suggesting most of the activity in distressed former bubble areas like Sacramento is first-time home buyers using government-insured FHA loans (and taking advantage of the tax credit), and investors paying cash.

This is a local market still in severe distress."

Giacomo said...

As a follow-up to my last post, I note that Pasadena is singled out by Dr. Housing Bubble as a place that "still [has] housing bubble delusion" (prices still at many multiples of local incomes).

Prices here in my Gold Country zipcode still on the decline, no question. 23 of the 30 most recent MLS listings are short sales or foreclosures. Of the 7 "normal" listings, 4 are relists that were first offered over a year ago.

Call it what you will, this is not a market that has the bottom in sight.

husmanen said...

Giacamo, I take a very surgical look at specific areas and even streets, so I don't have general MLS view. BUT I do have a microcosm view and NONE, ZERO, NADA of the houses that come on my radar screen are 'organic', i.e. non-flipper, non-bank or non-preforeclosure.

That is scary. I cannot imagine this being called normal and providing some type of pricing bottom.

BTW, Dr.HousingBubble is great!

sacramentia said...

"wonderful deals to be had on a some of the short sales"

I've heard of out of escrow money being thrown around to be an exclusive bidder on a short sale. 100k in one instance.

I am no longer believing short sale prices. Recently I got a long winded excuse why a Realtor wouldn't even submit my bid.

If it is too good to be true...

Diggin Deeper said...

With the RE market being suppressed, it creates fewer dollars to be spread around. Not suprised that those holding precious listings are also involved in the manipulation. Are we witnessing a black market forming in real estate? Cash is king.

As an aside, today PPI for November up 1.8% vs .8% estimate. Last week media pundits were crowing over a 1.8%jump in retail sales. John Williams at Shadowstats has it right, it's a zero sum equation as rising wholesale prices eat away at any growth shown in retail sales numbers. Energy costs rose 14.2% over the period.

husmanen said...

So if cash is king and the market is turning into a 'black market' there should be 'loan sharks' appearing, as to make 'bridge loans'.

Theoretically, you could use a loan shark to get purchase cash, purchase a home at a great deal, turn around and get a loan on the house, pay off the loan shark with an additional fee plus interest.

Home free so to speak...

Diggin Deeper said...

If this market gets any more convoluted, purchase money sources might be an essential go between on a housing deal. If cash truly gets the best deal, would be buyers could then compete on a level playing field. I wouldn't wait too long on refinancing, as rates and prices, together, might not be going in the right direction.

Diggin Deeper said...
This comment has been removed by the author.
Diggin Deeper said...

Foreclosure buyer demand dips as supply mounts

"Buyer expectations are becoming more realistic, Trulia Chief Executive Pete Flint said on a conference call.

Next year "government interventions will start to disappear, shadow inventory will hit the market and mortgage rates will start to rise" to around 6 percent from under 5 percent, he said. "We're in a false state of stability."

No kidding? A perfect storm appears to be brewing? As year end is approaching, a new fiscal year gives the banks some incentive to release aging inventories so they can schedule another year of losses ala Japan style.

husmanen said...

Here is a funny video on the housing market.

The 12 Months Of Default Song (Christmas Song)

sacramentia said...

"Theoretically, you could use a loan shark to get purchase cash, purchase a home at a great deal, turn around and get a loan on the house, pay off the loan shark with an additional fee plus interest."

My understanding is if you pay cash for a home and try to refi, you can only get 40-50% LTV because the refi is considered cash out.

Anyone know differently?

husmanen said...

Also, if anyone knows of someone that has used a 'bridge loan' or 'hard money' loan successfully at an auction, then paid it back with a loan.

If Sacramentia is correct then you would need a smokin' deal, e.g.
- peak price $900k
- current price $450k
- auction/purchase price with 'hard money' loan $220k
- bank loan 50% on current value of $450k or $225k
- pay off 'hard money' loan with bank loan

Lots of moving pieces and lots of risk.

Diggin Deeper said...

"My understanding is if you pay cash for a home and try to refi, you can only get 40-50% LTV because the refi is considered cash out."

If that's the case, you'd better buy off the court house steps...

smf said...

I just heard on the radio about all those Bay Area investors buying homes in Sacramento, and I looked at my calendar and realized that we are not in 2005 still...yet the same thing that caused this still goes on.

The bottom is nowhere in sight.

patient renter said...

I just heard on the radio about all those Bay Area investors buying homes in Sacramento

Well yea, since prices have gone down homes are now a good deal! Prices are down on Beanie Babies too, making them a great buy as well!

husmanen said...

Unless they are buying with a clear ROI that takes into account taxes, insurance, vacancy, HOAs, operating expenses, management fees, maintenance and a 10% yield they are just called...


They could be one and the same as during the bubble, however the tools that helped make the bubble have been severely hampered, e.g. Alt-A, Option ARMs, low unemployment, lower taxes and the belief that 'housing always goes up'.

Other things that are different this time are stricter lending standards, greater debt that is being paid down and a large shadow inventory.

This may be a big and last slap down for the 'amateurs', a little like the dot com bubble when many were buying on the way down. I know from personal experience, hard to give it up.

But there is always the new FHA to pump the bubble.

husmanen said...

Just had a friend pull some data on two pre-foreclosures in EDH. With the data comes info on comps in the area, last six months. Out of the twelve (12) comps eight (8) had put down less than 5% and four (4) had used the typical 20% down.

Even if appreciation is flat for 5 years the eight (8) are under water with a 6% commission. Crazy!

FHA is rockin' at all levels!

Deflationary Jane said...


Don't be too jealous. These are not happy times. I lost my mother and her sister within months of each other. I'm pretty grief stricken.

in other news...
Higher vacancy rate found in off-campus housing

husmanen said...

Sacramento County median resale home prices climbing

“For the first time since May 2006,Sac County median home sales prices - for resale homes - have climbed above the same time a year earlier, property researcher MDA DataQuick reported Thursday.”

“Sacramento County's median price for new and existing homes combined still remains 5.4 percent below Nov. 2008.”

Does that mean the ‘new’ homes are bringing down the average and/or they are a higher percentage of the total number thus moving the median down?

Also, “El Dorado County: 201 sales at a median price of $289,000. Prices are 13.7 percent lower than the same time last year”. This was nearly the worst of the group, Amador had a 21% drop.

sacramentia said...

As far as I can tell the Specuvestors are back in force now that the markets are up and everything is going to be ok.

I purchased 3 homes in the last 18months all with numbers that will work even if the homes depreciate like a boat.

Since late summer I've been getting outbid by as much as 2x. It is time to wait for the sky to fall again.

paranoid renter said...

I just heard on the radio about all those Bay Area investors buying homes in Sacramento, and I looked at my calendar and realized that we are not in 2005 still...yet the same thing that caused this still goes on.

The bottom is nowhere in sight.

Totally agree that the bottom is no where in sight. If and only if there are huge job losses in the Bay Area will the madness stop, because that's the only way salaries will go down. Until then people there will make insane money and need to find places to park it.

paranoid renter said...

From Calculated Risk:

This is probably the end of the "good" housing news for a while.

paranoid renter said...

An interesting post from Denninger where he thinks the markets are pointing to long term rates rising, which in turn means falling home prices.

That's not a knife you caught if you were playing in the real estate market of late. It's this: [graphic of chain saw]

Alex said...

Who knows what will happen in the future but with a lower price and higher rate, if rates go down you could refinance, if rates go up you would have a lower rate locked, and if you wanted to the principal would be easier to pay off. Miami real estate

Diggin Deeper said...

"An interesting post from Denninger where he thinks the markets are pointing to long term rates rising, which in turn means falling home prices."

Long bond rates are getting close to a breakout. 30 year hit the 4.61 level yesterday, and today it appears the Feds are trying press it back down. With all the $T financing that needs to happen in '10, odds favor higher rates. Recent long term bond sales have been lackluster, and we continue to lose foreign support at the longer end.

I'm not a believer in the axiom that "I'll refinance later at lower rates". We've had a decades long bull market in bonds, and it's way overdue for a correction with mortgage rates returning to more historical levels.

But the same game that played out the end of '08, with rising rates and a stronger dollar, eventually broke down later in the spring. So who knows? With all the manipulation in the bond market, things could get volatile in a hurry.

husmanen said...

Interesting. The 30yr fixed rate at is higher than I have seen it in months, 5.20%. The rate is 0.13% higher than last week.

husmanen said...

A neighbor that bought about a year an a half ago, for above market at that time, is trying to rent their place out.

The rent is higher than market but it doesn't come close to the PITI (<25%). It also appears they are doing a very shady rent-to-own scheme on it too. I wouldn't touch that one with a ten foot pole.

As a footnote, social services and the local police have visited the house a few times in the last few months. Something is cookin' in the kitchen!

husmanen said...

Update on the unpaid taxes in the microcosm area in Folsom that I monitor.

I rechecked all those that initially had unpaid taxes in Dec 10, 2009 and about 30% have cured their account.

As mentioned earlier, this can be due to a number of reasons, many legitimate.

There are still a larger number than last year, so we will see what happens.

paranoid renter said...

Interesting. The 30yr fixed rate at is higher than I have seen it in months, 5.20%. The rate is 0.13% higher than last week.

Bernanke just refinanced his house from an ARM to a 30-year fixed, even though the ARM's rate was lower. Calculated Risk speculates that this is because the 30-year fixed is now on its way up now and probably won't drop any time soon.

Diggin Deeper said...
This comment has been removed by the author.
Diggin Deeper said...

$118 Billion in bond debt will be on the auction block next week. This ties a record for the highest volume of bonds ever offered. We ought get a glimpse of where rates are headed. The yield spread between the 2 yr and 10yr bond is at its highest point ever.

Bond rate cycles tend to average about 22 years in length so the timing is about right to change course. With world trade down across the board (probably between 15 and 20%worldwide), demand for US debt is diminishing. Another factor is that domestic output is weak and cannot create enough dollars to meet an exploding Fed balance sheet which is up over 140% over 2008. When you add it up, something's got to stimulate buyers to purchase all the debt we're laying on the country. Debt spending either goes down in a big way, or interest rates have to rise. It's an easy bet on which will happen first.

PeonInChief said...


I'm so sorry. Thoughts...

husmanen said...

Strategically walking away is occurring in our area. At a few Christmas parties I heard the similar stories of walking away.

One story in particular concerned a real estate agent/broker/financier that drank the kool-aid and wanted a loan mod plus principle reduction. The bank went for the mod and a principle reduction of $120k, but the guy needed $250k to not be under water.

The bank balked, he balked too and the bank got the house back after a year without payment. Original price >$700k, current value <$450k and still going down.

At the same party, a guy that I avoid any real estate conversations with acknowledged his former house, that will never go below $500k, is now worth $350k. We avoided the subject of his current house as his wife strong armed him to buy in 2008 for the high $700s. OUCH!

He might be the next strategic walker...

Avoiding RE conversations is difficult. Changing subjects and just say a lot of 'hmmm', 'ohh' and 'wow' seem to work. That should get me through the holiday season.

paranoid renter said...

What's going on in Roseville? I've never seen the place so busy before. Took me 1/2 hr to drive 4 miles. Restaurants super busy...

Boom times are back with a vengeance!

norcaljeff said...

Hussman, you ought to throw out the topic at those parties seeing how got away with free rent in those homes before they were kicked out.

PR, people from all over Norcal come to Roseville, so that's no surprise. And when you're homeless the last thing you wanna do is sit alone in the cold, so people go to Roseville and run up credit card debt to feel better.

mopar777 said...

Husmanen, that's one reason I took up ballroom dancing in 2007 just as this crash was getting going. Talkie parties are full of hard luck stories right now, even in Folsom. Do they want to hear about how I saved during the boom times and then "stole" a rental duplex in a prime Fair Oaks location for cash? Of course not! Holding a pretty girl in my arms as we dance to the music is so much more satisfying. And when she starts telling me about how flat broke she is off the dance floor, I just go grab someone else.

husmanen said...

NorcalJeff, I know how they got to stay for ‘free’, they just didn’t pay the bank. If they owned the home and were renting it out they got a bonus, rent money but did not have to pay the bank. My former neighbors were renting and paying rent for over 18 months and the owner never paid the bank. The owner pocketed about $36k from a house he put zero down and got an immediate second for over $100k. That’s working the system.

Mopar777, nice story, I guess the impact of the boom/bust has ripple effects everywhere, even ballroom dancing.

husmanen said...

We bid on a house about a month ago where I supplied supporting information/data to support my offer, which was 40% less than asking. The counter offer dropped the price by 20% and said they could get asking if they waited and they had time. No problem, I have time too and the house wasn’t 100% perfect for us.

Well, recently, a price drop of 20% occurred on the house. Now we are not interested, getting more picky by the day.

With rates going up, my attempt of getting a future price at today’s low rates may not work out. That’s okay, it would have been a bonus.

patient renter said...

That NYT article the other day with Karl Case more or less calling a bottom has been refuted by more than a few people. Here's Dean Baker's take: