Real Estate - Heard it on the Grapevine

(comment by a proud renter over yonder)

"On Sonoma County bubble - last four homebuyers I have met in Sonoma County:
1. Gardener
2. Gardener
3. Maid
4. Pool cleaner

The pool cleaner now believes he is a real estate “investor” having just completed the purchase of a second home in Sonoma County.
The maid purchased with no money down and a cash kickback from the seller to cover closing costs.
One gardener used a “liar’s loan” to qualify with a salary at least 2x reality.
The other gardener looked at everything (upgrades, etc.) in terms of monthly payments, as in “I told them to go ahead and add it, it’s only X dollars a month more.”
Wow - I guess this must be the “smart money” moving into Sonoma real estate."

Fewlesh of the fabulous reality parsing patrick.net, posted a recent conversation:

"My co-worker was telling me last week, that the greatest benefit to owning her house has been the fact that she has a tax deductable credit card with a 7 percent interest rate!"

The year is 2006 where a house is nothing but one great big tax deductable, low interest rate credit card, or for some simply a residential ATM. America has hit the record bottom of the savings rate.

"In fact, Americans spent all their income and dipped into their savings last year - the only time the savings rate has been negative for an entire year except in 1932 and 1933. (The Great Depression)

Economists say many people felt confident about piling up debt because the value of their homes soared over the past five years.But the savings rate hit a negative 0.5 percent at the very time that it should be rising, economists lament."

"During 2005, Americans spent $411 billion more than they earned. According to the US Commerce Department, Americans started to dip into their savings in June. The spendfest hit a peak in August, and while over-expenditure calmed down somewhat since then, we are still spending more than we are earning."

People no longer need to bother spending actual money, they are spending houses, and the housing prices have skyrocketed in direct proportion to the appetites for conspicuous consumption.

"Since 2000, housing equity has increased by $4 trillion dollars. That is equivalent to $70,000 for each household in this country.

With this new found collatoral, and low interest rates, Americans turned to the banks. They were all too willing to extend home equity loans to finance new cars, renovations and holidays."

The national debt has hit so many digits that I think if I posted the actual number it would blow the margins on the page.

Oil prices don't seem to have a ceiling and even though it no longer seems absurd for it to hit $100 a barrel, people keep refinancing their homes to buy yet a newer Escalade, or Hummer, or slick Limited Edition Tahoe, Suburban or Yukon.

The kids likely don't have college funds, because that would be too much like saving money. Maids and Gardners lying about their income, getting no money down mortgages are the new generation of real estate investors.

Sound like an episode of the Twilight Zone?

Welcome to Sonoma, CA.


MoonValley was talking to one of her neighbors the other day about the future of real estate in the valley:

"the reason things will never go down here is that there are so many wealthy people out there just waiting to buy, and they can afford anything. I explained to him that just because someone has money it doesn't mean it's burning a hole in their pocket. In fact the reason that they have money is probably due to foresight and self control in the "I want" department. After all why should any self respecting wealthy person shell out now, with all the bargains just around the corner. He just said..O! "

What I want to know is WHERE are those wealthy people? 7% of the county population?

Moonvalley has keen ears so she also picked up this little baby at lunch:

"Just got back from lunch off the Plaza, (Girl and the Fig) there was a table full of Realtors behind us, about 7 of them, anxiously talking up properties. After scarfing up an 800 dollar lunch..(heard them discussing the bill)..they all checked their Blackberries. One sort of pouted and said…”hmm, no messages. I’m kind of getting used to that”


I heard this one myself

"Its a buyer's market"

LOL... are you kidding me? This can ONLY be said by a real estate agent, and I am not sure how one keeps a straight face upon hearing it. I certainly didn't.

It is NOT a buyer's market. Not yet it isn't. It is still a fool's market, and we are playing the game of "Who is the biggest fool?" Guess what, if you are in a house with a couple agents and about to dial up your mortgage broker, and ask for a no money down $800k I/O for a remodeled 1930's cottage on the east side, and you don't know who the fool is yet.... it is you.

Seriously, can you afford to buy this house? Or right, real estate only goes up and you will keep it until it appreciates and sell it to a bigger fool.

If you are telling yourself this is a good investment think about this..... If 7% of the population in your town CAN'T afford a median priced home... WHO is going to buy this one from you for more than what you paid for it?

It will be a buyer's market when the the prices reflect the ability of at least more than 7% of a county's actual population who can afford to buy a home at the median price range. THEN we will have a buyer's market. Why? Because then you will have buyers.

Otherwise what realtors mean when THEY say it is a buyer's market is that they need to keep the fool's gold flowing, and they are in the business of parting fools from their gold, and it really doesn't matter which side of the fool cup you are drinking from... just keep drinking.


From SFGATE

" This spring, Bay Area homeowners are likely to know whether the housing market has merely paused before resuming its upward climb or has truly downshifted to the slow lane and, if so, how dramatically.
Last month, the number of homes sold declined for the 10th month in a row and hit its lowest level since 2001, and price gains slowed markedly as well. "

"As the current housing frenzy exhausts itself, variables ranging from interest rates and employment growth to affordability, new home supply and sellers' willingness to part with their No. 1 asset will help determine the swiftness and magnitude of any downshift."
"Making this cycle more unique ... is that there's been a big increase in homeownership since the early 1990s," said Celia Chen, director of housing economics at Moody's Economy.com."

"We've brought a lot more people into the market, and it's uncertain how these people will react in a down cycle."

What she probably means is a lot of people who couldn't afford to buy houses at over-valued prices have bought anyway because of the availability of risky, exotic financing, thus artificially inflating property values. We don't know yet if the state of the economy and rising interest rates will devastate people who make far less money than can sustain the current pricing. She is really saying that we haven't seen easy credit and so much of it to so many people since, well, since just before the crash of 1929 and the Great Depression. If people vulnerable to interest rate fluctuations suddenly find themselves unable to manage their debt we could be in a world of hurt.

"We would have had a (housing) correction in 2001, 2002 and 2003 if interest rates hadn't been cut as they were," said Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley.

Rosen believes low rates and easy credit have borrowed demand from the future and guided many recent buyers into riskier loans."

"Last year, about half of Bay Area home buyers took out interest-only loans, according to San Francisco's LoanPerformance.com. These loans require no principal payments during an initial period.

At the end of the period, however, monthly payments jump as principal payments start coming due. With interest rates expected to rise gradually through the year, payments could soar even higher, putting some borrowers into precarious financial positions."

"The high use of interest only loans illustrates the eroding ability of many consumers to buy ever-pricier homes, which some experts liken to a balloon that eventually hits the ceiling. "

"We're really shrinking the number of people who can buy in the marketplace," said Keitaro Matsuda, senior economist at Union Bank of California. "If the market conditions weaken, that could show up more dramatically because there are so few people who can step in and play the game."

"As home prices rose at a record pace, rents have lagged far behind -- a fact that alarms some economists "

"According to DataQuick, the typical Bay Area home buyer committed to a monthly mortgage payment of $2,867 in December. Meanwhile, the average apartment rent in the region in the fourth quarter was just over $1,324, according to RealFacts, a Novato firm that tracks the rental market."

To some, that discrepancy is yet another sign of an overvalued purchase market.

"There's a disconnect between the fundamental value of the asset and the value the market is producing," said Ed Leamer, director of the prestigious Anderson Forecast at UCLA. "It's just like the dot-com period."

"In the aftermath of the Nasdaq nosedive (and accompanying low interest rates) and Sept. 11, there was a noteworthy shift to real estate as a safe investment haven. Refinancings and second home purchases soared, and streets were clogged with contractors' trucks and appliance stores' vans as homeowners beautified their nests to boost value."

"Still, there is some concern that too many consumers are devoting exorbitant portions of their incomes toward housing, and therefore remain vulnerable to a slackening in the market. A 2005 Public Policy Institute of California study found that 1 out of every 5 recent home buyers in the state is spending 50 percent or more of his or her income on housing costs -- twice the national average. "

"Flipping
There is a certain class of home buyers who are in the market strictly for the profits."

"Economists keep a close eye on the number of pure investors in a given market, because their lemming-like movements into and out of housing can often prompt a rapid change. "

My questions, how many flippers invited themselves to the Sonoma Party, and how many are heading for the door? How rapid of a change will we see in our corner of the real estate bubble?

Its all about Supply and Demand....

"In a booming market, buyers love your home more than you do, Leamer said. But in a downturn, you love it more than they."

"Building giant Centex recently offered buyers in communities from Benicia to Brentwood discounts of between $40,000 and $100,000 on selected models for a limited period."

"People are rejecting higher prices, and in single-family homes in particular, prices have gotten so high that it's pretty hard to qualify," California Building Industry Association economist Alan Nevin said. "

"A tight supply of available land and housing supply is one hallmark of what Columbia University real estate professor Christopher Mayer calls a "superstar city," one in which price declines are relatively rare.

The other is what he calls the concentration of "high human capital workers" -- or a wealthy, educated labor pool. The argument goes that as San Francisco and New York and Boston shifted from manufacturing centers to technology and service hubs, they grew more expensive and attracted people who can afford to live there -- people whose incomes (or maybe wealth) are going up at faster and faster rates. "

"The rich can outbid the poor for the limited slots," Mayer said.
The cycle feeds on itself, and these cities draw people from all over the country and the globe."

Gamblers place your bets... While Sonoma may be a small town, and thus having a limited supply of housing and land, I doubt this is the sort of limited availability Mr. Mayer is talking about. As for a wealthy educated labor pool. See the statistics on the jobs in Sonoma County and revisit that average income statistic again. SF and Silicon Valley areas may in fact have a little more in their favor when it comes to weathering steep market corrections.

Taken from Crash2006, originally liberated from Bubbletracking who got it from www.ziprealty.com (grapevine)

"The market is turning rapidly on the West Coast. Faced with a paucity of buyers, sellers have been forced to cut MLS listing prices. In some bubbletowns, up to 30 percent of properties are now offering price reductions. Moreover, the ratio is rising rapidly; a sure sign that the bubble is rapidly bursting on the west coast.The data is taken from the bubble markets inventory tracking blog, who in turn, downloaded it from the http://www.ziprealty.com/ website."

All sites are thoroughly recommended.

Update... From ReturntoDC's place

"Californian mortgage default rates up

The consequences of a slower house price appreciation, higher interest rates and lax lending criteria are now being felt in California. DataQuick Information Systems have just reported data on the number of default notices sent out to distressed Californian borrowers during the last 3 months of last year.

Statewide, the number of notices increased by 19 percent compared to the previous quarter and almost 16 percent compared to the same period last year.

However, the increase in default notices was not spread equally across the state. In major bubble centers, the increases were higher.

In San Francisco, the number of notices jumped 45 percent,

while in Napa, the number leapt by a staggering 175 percent.

Meanwhile, Los Angeles recorded a more moderate but still unhealthy 10 percent increase.

The Mortgage Bankers Association will shortly publish nationwide housing loan default data. Where California goes, America often follows. Expect a sharp increase in foreclosures in all major bubblecenters."