"The 'Housing Soufflé' is Out of the Oven"

Recently, the Associated Press declared that the "five-year housing boom in the United States is indeed over." Meanwhile, Professor Sean Snaith and the folks at the University of the Pacific's Business Forecasting Center in Stockton are sticking with the soufflé imagery. In their quarterly national forecast, the Center admits that the national "housing soufflé" is now out of the oven, but there is no need to panic. From an article in the Central Valley Business Times.

The housing market is cooling, but not collapsing, according to the report, released Tuesday. "The 'housing soufflé' is out of the oven and house prices will settle as this sector cools off, but the alarmist predictions of a recession due to a collapse in prices will not come to pass," it says.

A section in the complete pdf report reads:

As the soufflé is cooling, the highest peaks inflated by the hot air that lifted the soufflé will be the ones to settle the most as the soufflé cools. The rest of the surface of the soufflé will remain stable as the cooling process takes place. This translates into a bifurcated housing market. The high priced "McMansions" will see a significant price decline as the soufflé cools, but the homes in lower price levels can expect to see fairly stable prices as this process unfolds. The primary cause of this discrepancy is affordability.

Note the use of the phrase "significant price decline," which is in contrast to what Realty Times calls "adjustments in pricing" for higher-end homes.

While the "highest peaks" of the national "soufflé" refers to a market segment, it also seems reasonable to apply this to geographic markets. So how much "hot air" does our local housing market have in comparison with the nation as a whole? According to the Office of Federal Housing Enterprise Oversight, the Central Valley has been at the top of the list for price appreciation.

Central Valley home values appreciated twice as fast as the national average the past five years, just-released federal statistics show. While national home values grew by a healthy 58 percent, Central Valley homes appreciated up to 144 percent since 2000. Valley counties - from Yuba through Kern - top the nation's list for soaring home values.

"I've been marveling at the appreciation rates in Central California," said Andrew Leventis, an economist for the Office of Federal Housing Enterprise Oversight...."The appreciation we've been seeing in your neck of the woods is unsustainable," Leventis said. "At some point, the rates are going to have to go down unless wages start growing at levels we've never seen before."

Here's the breakdown from the Modesto Bee.

Percent Increase in Existing Single-Family Home Values Between 2000 and 2005:

• Sutter/Yuba: 144%
• Madera: 144%
• Merced: 142%
• Fresno: 142%
• Stanislaus: 140%
• Kern: 136%
• San Joaquin: 123%
• Sacramento/Yolo/Placer/El Dorado: 122%
• Tulare: 119%
• California: 117%
• Solano: 114%
• Kings: 111%
• United States: 58%

Looks like the Central Valley has some of the "highest peaks" in the national "housing soufflé." So will the Central Valley markets "settle the most" as the national housing market cools? Just as the high-end market is expected to suffer because of affordability problems, the Central Valley is at risk for the same reason. Based on PMI ratings, a recent article described Sacramento as the 8th most "treacherous" market in the country, largely stemming from lack of affordabilty.

Meanwhile, the LA Times reports that the vast majority of Americans believe the "housing soufflé" is still in the oven, although some are beginning to fret over their adjustable rate mortgages.

Americans remain largely optimistic that home values will keep rising in the next few years, but some are concerned that they won't be able to keep up with their mortgage payments, according to a Los Angeles Times/Bloomberg poll. More than one-quarter of those who have adjustable-rate mortgages say they aren't sure they'll be able to make their monthly payments if their interest rate goes up. These loans have been particularly popular in California and other states with high housing costs.

"I think the 'bubble' talk is hyped," said Deane Harvey, a 66-year-old retiree in Foster City, Calif., in a follow-up interview after the poll. She and her husband, David, have made a business out of buying and selling houses in the Sacramento and Phoenix areas for the last 2 1/2 years. Harvey said she believed that the market had entered a slowdown, but that demographic trends in the growth of households and the lure of Sun Belt living would shore up prices in the regions where she and her husband had invested in homes.

Phoenix and Sacramento? At the same time? Ouch!

In contrast, home-buying attitudes dropped to their lowest level in 15 years, according to the Index of Consumer Sentiment (Inman News).

Favorable home-buying attitudes fell to their lowest level in 15 years in February due to increased resistance to high home prices and rising mortgage rates. "Complaints about high home prices were voiced by more consumers in February than any other time during the past quarter century," Curtin added.