Wednesday, November 03, 2010

Sacramento Real Estate Market - November 2010

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

52 comments:

Lucky said...

Does anyone know what is happening with the overall foreclosure market?

I know that is a vague question, but this is why I ask. A friend of mine wants to buy a foreclosure at an auction but is concerned that he could potentially be opening himself up for litigation... He is planning on buying in a specific area that he knows well if the price is right - he plans on doing some renovations and moving in (not flipping). He thinks that if the foreclosure mess in other states bubbles over in to California he could be in trouble. He's worried that the government will somehow screw him over in the end. I explained that the mess in other states are due to different systems (where judges are involved) but couldn't elaborate passed that, unfortunately.

It seems that I have tuned out over the past month or so. Between going on vacation for a while and getting sick of reading the negative news all the time, I just haven't followed what is going on as much as I should (or normally do).

What information can I look in to for him? I, normally, have an answer (or at least a strong opinion) for my circle of friends on these types of real estate issues... so I feel quite a bit out of touch.

husmanen said...

Lucky. Regarding your ‘vague’ question about the overall market I can attest to a slight change, but not much in the very selected areas I monitor.

Your friends concerns regarding any spill over to CA would be a political one that would have to adhere to our state law. The process ‘problems’ that have been referred are focused on the ‘judicial’ process for foreclosure which CA primarily does not have. We also have a ‘single action rule’. Then there is the issue of MERS, which is the system to transfer title outside of the County Records to avoid fees/paperwork and facilitate the financial aspects of bundling loans for resale (Bonds/Securities).

Not sure what your friend means by the Government screwing them I would be much more concerned about the banks.

The above is one aspect of the risks that are involved in purchasing a foreclosure, but, in my opinion, buying a home at auction has much greater risks than that, for example:

• Some judgments/liens may not get wiped out(HOA fees, tax liens, contractor liens, seconds/thirds)
• Buying a loan on a house that is not ‘superior’, meaning the first in line to get the house as collateral, which means you bought basically nothing.
• Tenants don’t move out
• No Inspection. Unknown damage to the house (condition could make it a house you could not get a loan on)
• Purchases are all CASH too
• Professional investors will bid up to a ‘fair market’ value, up to where their margin is gone.

It can be done, but there is a lot of legwork and risk. But with risk there is reward.

Your friend could consider identifying a professional auction flipper and presenting them with a case scenario where it is a win-win situation and then watch and identify houses that are of interest. This is one of my strategies and it takes time.

patient renter said...

Your friend could consider identifying a professional auction flipper and presenting them with a case scenario where it is a win-win situation and then watch and identify houses that are of interest.

That's interesting. Is the idea here to leverage the professional's expertise towards dealing with the points you mentioned above, then allowing them a small profit while you take the house?

husmanen said...

PR. Yes absolutely. So the professional flipper could make a quick and solid sale with an pre-agreed upon margin/profit while taking all the initial risk - doing what they are good at (running the number, checking liens, evicting people etc).

The professional flipper is not laser focused on a specific home(s) they do the financial analysis and can give you honest and hard comments/advice. I have received many of these and my contact person has been 100% right every time.

I do all the initial leg work on specific homes and come with about one or two every few weeks. Most are postponed, canceled or go back to the bank. A few that have sold to a 3rd party have gone higher than I would accept for the risk.

While the ultimate buyer buys a house that is below current market levels and is assured a 'clean title' from the flipper. The buyer still has risk as there can/will be many issues with a foreclosure.

tbfolsom said...

With all the talk about the next mortgage crisis is building up in the MTH (mid-to-high-end) housing segment, I’m surprised at low number of short sales and foreclosures around Folsom and El Dorado Hills areas. It seems as the numbers of foreclosures and short sales homes at back down to the levels of early 2008. Is the prediction for increasing defaults and foreclosures across the MTH housing segment never materialized? Are the banks holding back the MTH foreclosure pipeline? So if the banks are holding back inventory, will they continue to do so to keep the inflated home prices with the new $600 billion government bailout?

Louie said...

After searching for our first house for over a year, and waiting almost 4 months on a short sale, the bank has finally approved the sale! We are so excited.

Despite the uncertainty still in the market, I think we are getting a good deal. The previous owners took very good care of the home and did a lot of improvement, and the square footage was understated by about 20% by the listing agent (according to the county tax records), so even if the market drops another 10% we're still ahead.

Interestingly, the listing agent demanded that the contract be amended to include a $1500 payment from us. Its a shakedown, and my agent was pissed, but to me its the price we pay to play the game, and I feel like we're already getting a good deal.

I don't know if people on this site like getting the specifics of the transaction and property, if so I can provide it once the deal is complete. (I don't know why, but I'm paranoid). Thanks again to all on this site who have helped keep me informed so I didn't buy at the wrong time. It would have been so easy without the knowledge gained here. Take care all, best of luck with your housing adventure.

husmanen said...

Louie. The best of luck to you and enjoy the new phase in your life. I am a little envious as I long to take the next step but a specific home has not made it through the gauntlet yet.

One house in particular, from last year, still sticks in my me and wife's mind. But that is it.

There are a handful I am keeping close eye on. One in particular that has much higher interest on my side than my wife, I too may concede this one.

Regarding your information sharing, that would be great. Whatever you feel appropriate would definitely help the rest of us prepare for our next venture.

Enjoy!

husmanen said...

No Rush. I was at a party this last weekend and was I speaking with some friends (a couple), that it turns out are mutual to you and I.

My conversation with ‘M’, the husband, and I discussing my latest home search in their area … Talus Ridge. M said his wife J’s friends just moved into a home and J mentioned a few details, I put 2+2+2+2+2+2+2+2 together and low and behold I believe we have mutual friends.

It truly is a small world.

patient renter said...

Are the banks holding back the MTH foreclosure pipeline

Yep, they still are. One house on my street in Folsom sat empty for at least a year and a half. The bank finally got around to cleaning and listing it a few weeks ago, but their asking price is at least 25% over what I imagine it can sell for. So it continues to sit.

Louie: Congrats!

husmanen said...

And the banks are still playing games with the ones they have on the market....

2393 HIGHLAND HILLS DR, EDH
Org Price $460k
Price Inc: 09/28/10- $460k to $478k
Price Red: 11/07/10-$478k to $459k

Awesome area and house, but very unique situation as the house has two major roads and a minor one on three sides.

tbfolsom said...

husmanen, combination of rising stock market and 2nd round of government bailout, I don't see any reason for banks to open up the foreclosure pipeline and drive down the home prices. They rather see all those foreclosures sit in limbo with no sales and no evictions than driving down the home prices. A friend on mine in Elk Grove, has intentionally defaulted on his 550K home but has been living rent free for over 11 months. Goverment needs to stop bailing out these banks so home prices will drop down to a more affordable level.

husmanen said...

tbfolsom. I agree 100% that US government intervention into the market has created the current scenario where we see people living in homes for extended periods that they haven’t paid for. My rental is one, I have paid rent for over 2 years without the ‘owner’ actually paying on the loan.

The last quantitative easing that went into effect last week was intended for the stock market and to devalue the dollar, in my humble opinion. QE2 makes people with stocks feel more wealthy – perceived wealth is important for consumption. Tying QE2 to an improved employment situation is difficult and indirect at best.

QE2, then QE3… QEn. When will it stop?

However, I don’t see the direct connection between QE2 and banks retaining homes that are on the books as bank owned or not starting the process on those that have been living in their homes without paying the mortgage. I believe this goes back to TARP, changes in Fannie Mae/Freddie Mac and the suspension of ‘mark to market’. The last point was put in due to ‘liquidity’, but I say it is the reason why the market is still ‘frozen’. Take that away and there will be a made exodus and the liquidation and the market can find its legs.

Also, I can imagine one day the jig will be up and the first bank out the door to process and flush their REOs will be at a decided advantage (1) they get the remaining buyers first (2) the prices are still dropping so they get more money than the next bank would have and (3) they may be playing under the ‘old’ rules where they get compensated for the differences between loans and market value… new rules may not be so kind.

husmanen said...

I like the write-up by Irvine Housing Blog today:

Versions of these stories are heard all over my neighborhood and from friends and relatives.

Victims and Martyrs of the Housing Bubble

http://www.irvinehousingblog.com/blog/comments/victims-and-martyrs-of-the-housing-bubble/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+IrvineHousingBlog+Irvine+Housing+Blog

PS My word verification was 'under'

husmanen said...

Just observed a house sell to a 3rd party in Folsom that is a good $500 less per month compared to rent, if you calculate a PITI based on 20% down, 30 yr, 4.25% APR.

Could be a flipper, and often are, but when flipped will probably be at rental parity.

Nice to see.

husmanen said...

So it looks like the homeowners tax deduction is also on the table to be axed, as suggested by the Bowles-Simpson deficit reduction package.

WOW, I haven't heard that being on the table, seriously on the table, EVER.

Some sacred cows may come down! Glad I do my calculations based on PITI and NOT after the Mortgage deduction (actually income reduction).

The NAR estimated this alone would drive housing prices down another 15%.

WOW!

luca said...

husman- you are so annoying with your constant rent mortgage/ parity - you live and die by it and your wasting your time.

look what is happening in ireland/ greece and portugal- look how high their rates went in 3-6 months- 9% on a 30 yr in Ireland, 11% for a 30 year in greece

that can happen in the USA to - it is not out of the question. What happens to your parity chart when you incorporate that?

-> people can't buy homes at even modest prices- with the higher interest rates prices will fall no matter what.

everything bought now should be well below replacement cost period and way below rent prices or you are getting a bad deal.

tough road ahead for housing especially in the sacramento region - government employees getting cut in huge amounts in near future- ; enormous shadow inventory of reos the banks are holding- literally a house on every other street. - I would feel much more comfortable buying a home when the banks get a normal amount of inventory and just a few people rather than the current 35% of the sacramento region have negative equity.

Lucky said...

luca...

you calling him annoying is ignorant... don't read his posts. He posts a lot of helpful information. I don't believe a lot of people's personal opinions, but husmanen at least tries to use facts on a regular basis. I think that the rental parity is not a perfect guide for all markets, but it seems to make sense now.

You can't predict interest rates. I personally feel that they have no where to go but up. I've incorporated potential interest rate hikes in to my investment calculations, but it doesn't really mean anything at the moment.

In most cases, I feel that replacement cost is a good deal. Below replacement cost is a great deal. In this market there is no reason to buy unless it is a great deal or the specific property has unique property values (great location, etc).

husmanen said...

Luca. You may not like it but it is a valid metric. Admittedly, not the only one I use but an easy one to get a handle on, e.g. if rent is $1800/month but renting money from the bank to buy the house costs $3000 that is not a good deal.

There are others metrics I like and use depending on the house and area.

Macro metrics include affordability, unemployment trend, homes available (inventory and potential inventory), price trend (sq/ft & median), number of homes sold (price ranges & types).

Micro level metrics like, rental parity are used in specific areas such as price to rent ratio, rental price trends and ‘investor’ type metrics like Gross Operating Income, Debt Coverage Ratio, CAP Rate and Economic Value, but those are a little over the top and don’t add much value.

If you got some metrics please share.

Lots of metrics, so little time. During the height of the bubble I yearned for an honest conversation and DATA regarding the local housing market. I found it here. I lurked for a long while and then jumped in and tried to provide honest opinion backed by data. The dynamic of the blog has changed with its participants and the market, but I feel like I would like to give back for all that I have gained. Thanks Lander!

BTW, Luca here is a good metric, one regarding your contribution to the site in the last year. Hmmmm….

Month… Contribution/Comment
Nov…1 Complaint about Husmanen’s Rental Parity
Oct…0 No contribution
Sep…0 No contribution
Aug…0 No contribution
Jul…0 No contribution
Jun…0 No contribution
May…0 No contribution
Apr…1 comment, ID’d a foreclosure
Mar…0 No contribution
Feb…0 No contribution
Jan…0 No contribution

Total in a 2010. One complaint and an identification of a foreclosed home.

Select References for Rental Parity:
Federal Reserve Bank of SF
http://www.frbsf.org/publications/economics/letter/2004/el2004-27.html
NY Times
http://www.nytimes.com/2010/04/21/business/economy/21leonhardt.html?_r=1

waiting_for_the_fall said...

that's an interesting last metric. lol

husmanen said...

Found some interesting MACRO economic from ALFRED (Archival, Fed,. Res. Econ Data) data for our area. Many of the graphs show a flattening, albeit at a very low level, no more dramatic decreases of late. Since there is a lag of a few months, things could be stabilizing. One would hope.

Looks like unemployment may be flatting out, but at a very high level. Population has not changed much in the Sacto Area.

Unemployment Rate in Sacramento County, CA
http://research.stlouisfed.org/fred2/series/CASACR5URN
Resident Population in Sacramento County, CA
http://research.stlouisfed.org/fred2/series/CASACR5POP

Also, as expected the number of persons working in Financial Activities in the Sacto area has decreased dramatically since 2005. Weird pattern to the Government employment in our area over the last five years, looks like down when the budget is being negotiated.

Financial Activities Employment in Sacramento--Arden-Arcade--Roseville, CA (MSA)
http://tinyurl.com/2b7ul8u
Government Employment in Sacramento--Arden-Arcade--Roseville, CA (MSA)
http://tinyurl.com/24y4hqn

Manufacturing looks to be ever so slightly improving as well as Leisure and Hospitality, after taking immense hits since 2005.

Manufacturing Employment in Sacramento--Arden-Arcade--Roseville, CA (MSA)
http://tinyurl.com/3657rtx
Leisure and Hospitality Employment in Sacramento--Arden-Arcade--Roseville, CA (MSA)
http://tinyurl.com/2vmclto

Lastly, private housing units have remained pretty low and appear to continue.
New Private Housing Units Authorized By Building Permit for Sacramento--Arden-Arcade--Roseville, CA (MSA)
http://tinyurl.com/35onyps

patient renter said...

look how high their rates went in 3-6 months

Ireland and Greece are a poor comparison to the US. The debt to GDP ratios, among other things, are not even remotely similar.

That said, we're all counting on interest rates going up and prices falling further when that happens. There's no secret there.

Wadin' In said...

Test

Wadin' In said...

Regarding the rental metric you should know that in South Placer County there is a serious shortage of single family honmes to rent. When you sort thru all the duplicate and bogus listings on craigslist, you will find very little inventory in Roseville, Rocklin and Lincoln.

A friend of mine is trying to rent a 4 bedroom house in that area and by the time he and the wife find one they like, the house is already rented. There seems to be 5 to 10 people for every house that comes up for rent.

There are several parts to this story: 1) more household formations as people migrate to attractive areas, 2) much of the normal inventory is stuck in limbo, as housing stock is tied up in short sales or foreclosures for months at a time and 3) very little new housing construction as builders can not compete with foreclosure pricing.

The fact is that Husmanen tracks rental parity is important. If there is very little rental inventory and lots of demand, rental prices go up, which is happening in South Placer. If Husmanen is seeing houses in Folsom sell for prices that equate to $500 a month LESS than RENTING, it is clearly a strong buying signal.

It also tells you supply and demand are out of balance. Will rental prices go down, or housing prices go up? Given the shortage of rental houses, I don't see the rent dropping.

husmanen said...

Wadin’ In. My house sale reference was to a home that sold at the court house steps at auction. All cash. Now if this was the ‘typical’ market price in this area I would be in a house right now with the BBQ going and a cold one in my hand, even though it is November.

The criteria for renters may also be part of the story, those with ‘bad credit’ scores are having to pay more or being excluded if there are other potential renters. Friends of mine rented out a house and 90% of the prospective renters had just gone through foreclosure or bankruptcy. They ended up choosing one, but they had to pay 10% more.

In the areas I monitor, the quantity of rentals ebbs and flows with the time of the month. About a week after notices are sent to landlords there are a plethora of homes, then by the end of the month only the homes that are priced too high or have other issues are left - lather, rinse and repeat for next month. I have notices a lot more, rental signs out in front of houses, those trying to avoid the cost of a property manager.

The prices of rentals have remained stable in my area or have even gone down about slightly (<5%). Two weeks ago there was a very nice home in a great area, 600sqft more than we have, 3 car garage, 0.3 acre flat lot, less than 5 years old and had loans against it lower than the rent… which was only $100 more than my rental. Now that is pushing the rentals in this area around a bit.

I also get the feeling that there are a number of rentals in this weird purgatory, like mine. Where the owner isn’t paying on the loan, the renters know this, they pay because they have a contract that says they have to or are kicked out, but the owner can’t easily rent out the home because it has an NOD filed on it. Very few new renters would take this risk, especially at market rents. I’ll try to take advantage of this when the time is right, but right now it’s worth it not to make any waves.

husmanen said...

Wadin' In. You might be on to something with the decrease in potential rentals.

I checked a few of my 'typical' rental sites outside of Craigslist and found they had very few rentals, one had only two (2) in total for all of its areas. They usually have >10.

Very interesting...

husmanen said...

A report by ClearCapital identifies Sacto as bucking the national trend and is identified as number 11 in the nation for top performing markets (Oct09-Oct10).

Sacto had a YoY gain of 3.8%, but had a QoQ loss of 2.2% with REOs making up 35% of the market. On this top performing list, only Miami had a greater percent of REOs at 39%.

But I guess compared to the national situation Sacto may look good as the quarterly price change was -5% and the yearly -1.2%. Looking at the lowest performing major markets Sacto does look good, at least we are not New Orleans, Columbus, Atlanta or Dayton.

Even with that comparison, I cannot seem to get our local statistics on Sacrealstats.com to correspond with their data. All these metrics appear to be more negative that what I can gather from the ClearCapital data on our local market YoY:
• Median asking price
• Avg asking price
• Avg sqft

And these are up:
• Inventory
• New listings
• Price Drops

Doesn’t look to bode well for bucking a negative trend.

But it all could all just be a point of reference.

Source:
Home Prices Continue Plunge Across Much of U.S., Clear Capital Looks Locally for
Unique Trends

http://jasper.clearcapital.com/user_data/userfiles/file/ClearCapitalHDIMarketReport_ThruOct2010.pdf?v=1

or http://tinyurl.com/2erjqzj

Wadin' In said...

Husmanen, fascinting report from Clear Capital. While we know prices are not going to go up quickly, to see Sacramento has bounced of the bottom is really interesting. Now the question becomes is it a sustainable bounce or just a dead cat rebounding from a 10 story fall!??

I suggest my own observences show increased traffic on the streets, more activity in restaurants, fuller hotel parking lots, a shortage of rental houses, and a few people getting part time jobs.

Don't get me wrong, it is still ugly out there, but at least some tangible signs show us moving in a positive direction.

husmanen said...

Wadin In. You might be right. I too see some of your same observations, slowly but surely we will change direction. Hopefully it is happening now.

On another note, here is some continued discrepancy (nearly 200k) in the EDH market for two non REO or non SS homes on the SAME street:

4139 Arenzano Way, $365k, 2658 sqft
4330 Arenzano Way, $549, 2669 sqft

Which one do you think will sell first?
Which one will become a short-sale in a few weeks?

David said...

Clear Capital may be upbeat on the Sacramento market, but the verdict is not unanimous. I read a story about highest-risk housing markets yesterday in the Wall St. Journal, and the accompanying graphic shows a near-fatal prognosis for the area both medium and long term.
http://www.smartmoney.com/tools/worksheets/?story=SMARTMONEYMARKET101115

husmanen said...

David. Thanks for the link.

I agree that we will see near term price declines and don’t think that Clear Capital and the WSJ article/graph are necessarily in opposition to one another.

WSJ identifies Sacto as having an 80% risk of decline in the near-term (2 years) while Clear Capital (CC) identifies a QoQ decline, 35% REO saturation and a YoY increase of only 3.8%. The CC YoY increase is what is a little out of whack with the rest of the data as it would ultimately suggest that we are still headed for declines. CCs data for Sacto might have been rosy compared to other areas but it is not good.

But what level of decline? WSJ data we only see if there will be a decline, a decline of 1% is the same as a 25% decline when stated this way.

Also, our market is not homogeneous and we have areas that are trending towards their long term price level while others are still floating in a semi bubble, albeit continuously deflating. It is the weight of each of these areas that will determine if the entire area goes up or down.

Here is an example, imagine in 2011 only 14 houses sold. 10 of houses sell for $100k (20% inc YoY) and 3 sell for $350k (28% dec YoY). The average price would dip nearly 5% but the median would increase 20% ($80k to $100k).

I definitely see Folsom and EDH dipping another 10%, maybe more. Other areas, like the Elk Grove, maybe not.

husmanen said...

Opps, actually imagine only 13 houses sold. That was my example. Sorry.

luca said...

I'm not saying the rent to price ratio isn't a valuable tool - it is just one of many in the arsenal - you are looking to close at current inventory and weekly trends when you forget about the huge distressed shadow inventory being held by the banks and artificially low interest rates- and a huge unemployed sector.


My point is - If the market was stable I would give a lot of merit to how great the rent price indicator is but the market is manipulated bs right now.

The Anonymous said...

While rental parity is a useful tool, I think its important to not be a slave to one particular metric, while ignoring others that give you answers you may not like.

For instance, I recently came across longstanding historical data for my area that showed "rental parity" has never existed.

In my area, it looks like there has been a premium associated with ownership whereby home prices were always leading rents by about 7-10 years. Thus, consider what would happen to 2 buyers 30 years ago when homes renting for $800 a month cost about $1200 a month to buy. Our buyer bit the bullet and was paying $1200 a month. Yet, our "rental parity" guy said, "this is crazy - im gonna rent at $800 a month".

10 years later, rents finally caught up and were now $1200 a month. However, by this time, it cost about $1600 to buy. Our buyer was now 10 years into his mortgage and still paying $1200 a month. Yet our rental parity guy still refuses to buy at an "inflated price" of $1600 and instead continues to rent at (now) $1200.

10 more years go by, and rents now have caught up and are $1600 a month. However, once again, homes are frontrunning and are now $2200 a month to buy. Our buyer is now 20 years into his mortgage and is still paying $1200 a month. Yet our rental parity guy is gonna continue to wait for rental parity and now rents for $1600.

10 years later rents have again caught up and are now $2200. However, the frontrunning houses are now approx $2900 a month. Our buyer is still paying $1200 a month, yet our rental parity guy is now paying $2200 waiting for that mythical day where "rental parity" arrives.

1 year later, our rental parity guy will still be paying $2200, while our guy who ignored rental parity has now paid his house off and will pay $0 from hereon out.

Is this a simplistic example? Of course it is. Im sure you could find many counterexamples, and give me hypotheticals that would make buying not a smart idea. Also, many markets do not have a premium attached to buying, so in these places, it makes sense to wait til you achieve rental parity from day 1 IF day 1 rental parity was common historically in your area.

Still, the point stands. In my area, homeownership had always had a significant premium over renting which is historically somewhere between 7-10 years. Thus, in my market, anyone wanting rental parity from day 1 and not knowing the historical lag would have been permanently priced out of this market.

husmanen said...

Luca You are absolutely right, the market has been manipulated in ways that I would not have imagined only a few years ago. Looking too close will blind you too, I agree. But given what we have how would you put value on a potential purchase? Any metrics?

The Anonymous Rental parity is an easy metric that the general public can get a handle on and puts things into light rather quickly. It is by far not the only metric one should use in evaluating a potential purchase, I have mentioned this numerous times.

If anyone has any other easy metrics please bring them forth, especially if you have “long standing historical data”. I don’t like or dislike data, it is what it is. On this site we really like data and references. Please share, otherwise it is just opinion and we know everyone has one.

The mythical example is just that – mythical. Are you saying that the rental house is EXACTLY the same as the purchase house, i.e. parity. Do you have a specific example, say from East Sac, Land Park or “your area”. Also, fear statements like ‘permanently priced out forever’ are not going to work with a more informed public.

But I do believe there are a few areas that do carry a premium that is beyond rental parity, but 50% more than rents is not realistic, from your example $800 rent/$1200 purchase, but there are a few areas out there. I can imagine a 10% premium for a few areas, but most of Sacto does not fit into this category, heck 90% of Folsom doesn’t fit this category.

husmanen said...

The Anonymous Now let’s do a financial comparison of your mythical example above BUT the renter decided to save the difference between the monthly rent and the monthly purchase price (PITI). This is mythical remember and would take a pretty focused renter.

The house renting at year zero would have a market value of $230k based on a 30 year loan, at 4.25% interest with 20% down.

For simplicity the rent and the house prices move in 10 year chunks, with the initial year there is a 50% premium for owning a home. From the your example above, the renter could put $400/month for 20 years in an interest baring account. The next 10 years the monthly difference is $600/month. At 3% compounded annually this equates to $426k for the renter in the bank at the end of the 30 years.

Now let’s look at the home owner. They own nothing to the bank on the house except for taxes and maintenance, probably $300/month.

The homeowners paid $230k in year zero and can sell at $575k which is the PITI for a $2900/month payment in year 30 or your example. They paid $426k in interest and principle over the 30 year life of the loan. To tap the house value they could use HELOCs or sell the house at a 6% cost. At which time they will either have to pay a small sum to a bank or move and buy another place at current prices, even downsizing has its costs.

To sum up it looks like the renter has $426k cash after 30 years and the homeowner has about $575k in the terms of an asset.

Neither were priced out forever and both enjoyed the same facilities, parks, schools etc.

PS Assumes there are no costs to the homeowner for 30 years,e.g. roof, HVAC, paint, flooring etc, except the $1200/month from year zero.

PSS at 6% interest for the renter they have $678k at the end of 30 years.

husmanen said...

I was thinking at lunch about those areas that diverge from rental parity over the long haul and found a rental house and a home for sale on the same street. They are very close to each other physically and with rental parity.

* 116 Rockbolt Cir, Folsom $365k (PITI $1878/mon, 20% down, 4.25% 30yr fixed)
** 103 Rockbolt Cir, Folsom $1900/month

Now, like the old days, the only thing differentiating the renter from the purchaser would be the down payment of $73,000, plus closing costs etc.

So 103 Rockbolt would barely make cash flow, excluding vacancies and maintenance/repair. If these houses were unique and had very special qualities (one-of-a-kind attributes), I could see their being a disparity between rents and monthly costs to own. In this case there doesn’t seem to be much reason for a discrepancy between rental parity and the home price.

The price of homes in some areas are/have been higher than rents, but this is not the norm. These areas seem to have truly unique properties that are of very high quality. AND the people competing for them are not wage earners, they have great wealth. They bid on percentages of their net worth not on their wage income.

That is great for areas of Land Park, East Sac or ? but it is not true of 90% of the Sacto area. These areas are unique and substitutes/comparables are limited. In Folsom and most of Serrano there were a few builders and they duplicated the floor plans all over town. I would venture to say, most of Sacto is not unique and does not have exceptional quality homes. This is just not the norm.

Sacto prices are largely determined by wages, the very wealthy don’t play our game.


References:
* 116 Rockbolt www.metrolistmls.com
** 103 Rockbolt www.ppm4you.com

luca said...

Husmanen- Sorry for being behind on the blog- I looked into some of your posts and noticed you are renting- now I see why you are looking into this blog so much- I am from the Bay Area invest in sac real estate for fun- and only buy stuff that is ridiculously low priced- that gives me at least 10% return on my money. - I don't use mortgages so the bank takes my low offers more serious as they know quick easy cash is on the other side.

I really really love Serrano as well- so beautiful- I remember looking at homes that were a 2 mil + going in the low 1mil price range and even below that :/ .

This housing market is definitely shaking all the people who should have not been homeowners out- but it is making smart hard working people like yourself oddly displaced - fearing buying something only to catch a falling knife.

If you are 100% positive you are going to live in your area for a long time and have the ability with credit to put little down because I would. - I suggest a low down because if the housing prices crash again hard you can 1- walk away with little skin in the game and 2- save your money towards just buying a place in cash or buying another place with a loan before you strategically default on your 1st home's mortgage =)
--> this will limit your risk and give you a great exit strategy.

husmanen said...

Luca. Yeah, renting keeps me focused on the market. Not sure what I will do when we actually buy, but I am sure I will find other subject to be OCD about. We have other former participants that have dropped off, wonder what they do now?

Speaking of Serrano. 508 Powers Ct was on Metrolistmls.com as a short-sale for $323k. Yesterday it sold at auction to a 3rd party for $326k.

Just as some background it sold for $546k in 2005. That is down about 41%.

Not sure what the Mello-Roos are there but the HOAs are $181/mon. If you assume 20% down, 4.25% for 30 yrs the costs is $1671. For a total of $1853/month.

Without the Mello Roos that place is in the money for a buyer with a long term perspective.

husmanen said...

Data Quick numbers are out for October 2010.
http://dqnews.com/Charts/Monthly-Charts/Sac-Bee-Charts/ZIPSACB.aspx

Looks like the median in EDH has dropped, but the $/sqft went up slightly with higher sales than previous month. Folsom slide of late seems to have had an ever so slight uptick in MoM data for in prices and sales. Data below:

……………………Median Price 2010
Area..…Jul..|Aug…|Sep…|Oct
EDH:…$430k|$445k|$446k|$405k
Folsom:$333k|340k|330k |$333k

………………………Median Sales 2010
Area….Jul..Aug..Sep..Oct
EDH:..…64…67…52…58
Folsom…63…59…48…52

$159sq/ft in Oct 2010 for EDH (up $2)
$167sq/ft in Oct 2010 for Folsom (down $4)

husmanen said...

Would you rent this house.

Craiglist*
2261 Cardiff in EDH: $1950/mon

Its been on the MLS as a short-sale for $375k. Total time on MLS 319 days!! Yes, nearly a year!

I don't know the story behind this one but renting that property sounds very, very risky!

References:
*http://sacramento.craigslist.org/apa/2057157075.html

** http://www.metrolistmls.com/

Wadin' In said...

2261 Cardiff

Record indiates the property has been occupied by the owner (tax exemption) and that he purchased it in 1997.

It is not showing as NOD anywhere. Hmm, curious.

3065 SF for $1950 is only $.64/SF. Not a bad rate, except it does seem to back up to El Dorado Hills Blvd, which has substantial traffic.

husmanen said...

Actually that is Lakehills behind the house, although not as highly trafficked as EDH Blvd there are still plenty of homes that use this as the main thoroughfare. Also, the max speed is 55 mph on this road.

In the County’s records it was identified as ‘not an open market transaction’ 1997, which could be a change in ownership title (incorporation, homesteading etc).

What is interesting is this case is that this house is a double bubble house. It was originally purchased in 1990 at the peak of the last local bubble, probably a little less than $300k. The original owner loses the house to foreclosure in 1994 and the house is sold in 1995 to the current owner for $245k – approx. 20% drop. The actual market bottom was in 1997.

So back to the Short-Sale, they must have HELOC’d the heck out of that house if they are trying to sell it at $375k when they bought it in 1995 for $245k, that house should be half way to being paid off by now.

husmanen said...

Short Sales are always tentative. If I understand this it looks like 3480 Rolph Way in EDH was Pending on the MLS for an asking price of $580k.

But it went to auction on Friday the 19th and went back to the bank (no takers) for the starting bid of $572k.

It will be interesting to see what the bank puts on as an asking price when it comes out later.

husmanen said...

Wow, here is another SS that got auctioned off today. The SS price was $440k and it was sold to a 3rd party for $312k today.

871 Mount Ranier Way, EDH

husmanen said...

According to CoreLogic, Sacto has 14 months of 'Shadow Inventory' or 'distressed supply'.

"...CoreLogic estimates shadow inventory, sometimes called pending supply, by calculating the number of properties that are seriously delinquent (90 days or more), in foreclosure and real estate owned (REO) by lenders and that are not currently listed on multiple listing services (MLSs). Shadow inventory is typically not included in the official metrics of unsold inventory. "

We've discussed this many times before. Doesn't look like it will flood the market anytime soon, BUT it is not going away.

Where will it go?

husmanen said...

A NAR Silver Lining, according to NAR 82% of Sacramentans can afford a home. True prices have gone down but what are their metrics to decide affordability based on?

Looks like its based* on an entry level price of about $157k, 10% down and an adj-rate mortgage at 3.66%. The monthly payment would be $820 and require an income of about $24k/yr.

But lets look at the monthly cost in a more traditional sense with the 20% down, 30yr fixed (4.25%). PITI = $808/month. Not bad but you have to put over $31k down.

Now what about the income required? The safe rule of thumb is the loan should not be more than 3X your gross income. $125k loan/3 = $41k per year.

I believe Sacto median family income is between $50k/yr** and $65k/yr*** (hard to find solid data).

Even with my 'traditional' calcs it appears Sacto is pretty affordable.

Reference:
*http://www.car.org/newsstand/newsreleases/q3hai/

**http://www.sac-lpc.org/pdfs/Child%20Care%20Plan%202007-12/Sacramento%20County%20Data%20Sheet.pdf

***https://edis.commerce.state.nc.us/docs/countyProfile/CA/06067.pdf

Wadin' In said...

Husmanen, Here is something to ponder: 871 Mount Ranier, 2800 SF, built in 1988 (market peaked June 1990). It sold in September of 1990 for $250,000.

Now get this: It sold in February 1999 for $227,500. People don't believe you can hold a property for ten years and lose money? The proof is right there.

The existing owner must have done a cash out refinance and is now walking away, realizing the $440,000 in financing exceeds the value.

Regarding your case about all the "shadow" or "hidden" inventory? One thing no one addresses is that most of these homes are occupied with people. This is not an inventory of vacant houses. When the foreclosure is completed, occupants will have to find a place to live.

This is much different from having 4,000,000 foreclosed and vacant homes on the market! This is more a game of musical chairs. When the foreclosure music stops playing (2011?), there may not be enough chairs (homes)!


This market is not as dire as many pundits claim. Just as the market was not as healthy as many pundits claimed in 2005!

smartlipoforyou said...

People want terrific 3 bedroom, 2 bath all brick ranch residence has so much to offer! You'll be very pleased with the abundance of space in the inviting home. The living room opens naturally into the huge updated eat-in kitchen where you'll find custom cabinetry & more than enough room to entertain during family & social gatherings. A soaring cathedral ceiling with exposed wood beams reaches high above the enormous great room that also features a toasty floor to ceiling brick fireplace flanked with built-in bookshelves, plantation shutters & a walk-out to the private back patio & level yard. There are stained solid wood doors adding character. Retire in style to the master bedroom suite with a private full bathroom. All of the bedrooms have full length mirrored closet doors. Hardwood flooring under carpet except family room. Treat yourself with an Appointment to view this one Today!
==============
Austin Real Estate

husmanen said...

Wadin In. Good catch with the sales history of 871 Mount Ranier.

From 88 to 99 they lost about 1% per year. From 99 to 2010 it looks like an annual gain of 3%, which was pretty close to inflation.

About the vacant homes, its prices that would keep them vacant (besides the 'potential supply'). When prices are in line with incomes, unemployment rates, long term trends etc there tends to be little vacancy.

Many of those that I know that are not currently paying on their mortgage plan to rent (with a wad of cash in their pockets).

They won't be homeless and the houses won't be vacant, just a different person on the loan papers at a much lower value.

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

Husmanen - I know exactly who M and J are. They told me about their conversation with you too. It's truly a small world. I've been busy repairing and moving in to the house but all is done now.

The escrow period was weird with little communication from First American Title and a mix up on our escrow refund. Dummies. But there were no last minute shakedowns.

husmanen said...

Data Quick numbers are out for November 2010.
http://dqnews.com/Charts/Monthly-Charts/Sac-Bee-Charts/ZIPSACB.aspx

Looks like the median price in EDH has risen slightly, but the $/sqft went down with higher sales than previous month. Folsom’s median price dipped a bit and had an ever so slight uptick in MoM data for in prices. Both EDH and Folsom the sales are up over 10% MoM. Folsom’s median price change YoY for Nov is -13.2% and EDH is 0.8%. Data below:

……………Median Price ($/000s) 2010
Area..…Jul|Aug|Sep|Oct|Nov
EDH:…430|445|446|405|415
Folsom:333|340|330 |333|328

……………………Median Sales 2010
Area….Jul..Aug..Sep..Oct…Nov
EDH:..…64…67…52…58…65
Folsom…63…59…48…52…63

$154sq/ft in Nov 2010 for EDH (down $5)
$167sq/ft in Nov 2010 for Folsom (same as previous month)

We may see a surge in December, but most probably January, as some people move off the fence since interest rates have been rising rapidly lately. Then probably a dip as those buyers are gone, but then the Spring selling season starts.