Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Friday, February 17, 2006

DUDE!!! Where's My Bubble?

(Barron's Online)

So, everybody's asking whether real estate's glory days are over, and if so, what's next?
The answer, of course, depends on where you are.
I have long argued that we're not in a nationwide housing bubble, although we've had some local ones (see Fighting the Tape, "A Housing Bust? Don't Hold Your Breath," June 23, 2005). Therefore, I didn't think we would see a general housing crash.

But I must admit I'm worried that we might see more than just corrections (10% or so) in some areas. And so are several experts and real-estate professionals with whom I've spoken this week.

"I don't think nationwide you'll see a bust," says Mark Zandi, chief economist of Moody's But we might in certain markets, he adds -- the usual suspects like Miami, Las Vegas and Phoenix.

And we may get some sense of how deep a correction we'll have sooner than we think.
"This is a watershed moment," says Jonathan Miller, president and chief executive officer of Miller Samuel, a large New York real-estate appraisal firm. "If we're going to see trouble, it's going to be over the next 12 to 18 months."

In fact, the spring home-buying season may well be a harbinger of things to come.
Bear markets, be they in stocks, housing or commodities, go through certain identifiable phases, like Elizabeth Kubler-Ross's famed five stages of dealing with dying -- denial, anger, bargaining, depression and finally acceptance.

So where are we in Sonoma? There are 174 condo + single family homes listed on GMAC MLS, though I have received 35 emails in the past three days of new listings that are not yet posted. According to and their nifty "search properties by newly reduced price option" there are 45 houses with new price reductions. Some are as great as $100k reductions, yet other sellers with their houses on the market 60+ days have made more than one reduction totally only $10k. Let me take a stab at the Sonoma stage...

From the real estate section of the Index-Tribune 2/10/06:

"There's been a big shift in the way people look at a home," says lauren Baier Kim, senior editor at the, the Wall Street Journal's online guide to property. "In the past, people would buy a home and work to pay off the mortgage. Now they use it as a piggy bank- as a way to get more cash. People think they can proft easily from buying and selling a house."

LOL... I can see it now... remember those old bumber stickers that said: What do you mean I'm overdrawn, I still have checks? The new ones sprouting up will say: "What do you mean I'm upside down, I still have a house?"

Not for long baby, not for long. The house is NOT the new ATM!

More from the Index-Tribune's real estate article:

"While the strategy (of using the house as the ATM) has worked for the last several years in most markets, that kind of thinking has obvious risks."

"No one knows whether the housing market will continue to appreciate or how high interest rates will go."

"Don't overspend when you buy your house, meaning don't spend more than you can afford and don't spend more than the property is worth"

Good advice... whoops... too late, 69% of Sonoma property just last year alone was purchased with those nifty, exotic I/O loans, and when one needs to have an income in the $150k range just to QUALIFY for a house they can afford, being the median house price is above $600k how much longer can this bubble stay in the air?

We already know that only 7% of Sonoma residents can afford to buy a home... and we know the average income of the Sonoma resident is around $46k a year...oh no, what do do, what to do? Dude? Where's my bubble?

Now back to your regularly scheduled program: (Back to Barrron's)

"It's a three- to five-year cycle on the downside," says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley.
Rosen calls himself a real-estate bear who endorses the doom-and-gloom scenario of Yale University professor Robert Shiller (see Barron's, "The Bubble's New Home," June 20, 2005).
We've already passed stage one, characterized by "a falloff in new sales and orders," says Rosen, and are just entering stage two, in which unsold inventories build up.

That may be where the crunch begins.
"If inventories keep rising, the pressure on sellers to cut prices will be intense," says Zandi.
Prospective sellers, of course, can just take their homes off the market and live in them until they think they can get a better price.

But speculators don't have that luxury: At some point they can no longer carry a money-losing investment, so they may throw in the towel and unload their once-promising albatross.
That's stage three, says Rosen, and it usually finishes about three years from the beginning of the downturn.

The final phase is when we see massive defaults or delinquencies on mortgage loans. That's several years away, he says, and this time the damage could be worse because of the large number of exotic loans giddy lenders extended to desperate home buyers (see Barron's, "Coming Home to Roost," Feb. 13).

So, we could hit bottom by, say, 2010. Rosen predicts actual nationwide home-price declines of 5% by 2007, the first time prices have fallen in any year since World War II.
You don't have to be a bear to worry about the real-estate market, however. Pamela Liebman, president and chief executive officer of The Corcoran Group, a leading New York real-estate brokerage, is pretty upbeat about the market her firm covers -- Manhattan, the Hamptons and Palm Beach, Fla.

Yet, she says, "there is no way we can [expect] the kind of price appreciation we've been seeing. There is an enormous amount of product hitting the market."
Inventory -- that's the key worry now. Will prospective sellers sit on unsold properties and patiently wait for buyers? Or will they panic and start slashing prices?

A lot depends on interest rates and the economy. Right now, the 30-year fixed-rate mortgage averages only 5.87% nationwide, according to
And the economy remains strong: Unemployment is just 4.7%, and economists expect GDP to grow by more than 3% this year. I see no signs of immediate weakness in either.
But people have a funny way of denying bad news during bull markets and ignoring good news when the bears are growling.

"The boom is over," declares Jonathan Miller. That perception no doubt has begun to trickle down to prospective buyers and sellers.


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