Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Saturday, February 18, 2006

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, 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.


" 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"

"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 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. "

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 (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 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."


At 2/19/2006 09:49:00 AM , Blogger Ruined Invegas said...

Great blog. Just posted a link to your blog on

At 2/19/2006 12:12:00 PM , Blogger moonvalley said...

Wel, more scoops from Table Talk at The Swiss Hotel last night.
We were dining with some old friends, and hearing the latest scoops as to what some other old friends were up to REwise.
Couple #1...."invested" with ano9ther couple , friends, (for now) in a house they purchased for 980k. A biiiiiiiig place to hear it. They fixed it up with the intent to flip. Well, after sitting for about 6 months, no takers they discovered their house was now worth about 850k. So they have been looking for tenants. They recently leased the place to someone for 3k a month, nowhere near what it costs in mortgage money. But of course, to hear my friends tell it "they are splitting the loss with the other couple, their friends (for now) so it's not so bad". They intend to put it up for sale in another year when they expect things to have gone up again.
Couple #2...Are looking to sell their place and move to Sausalito, which is a closer commute for his work. They have some idea of getting some huge price for their place. I don't know what they owe on it, but there have been an awful lot of olive picking trips to Italy, and he just drove up to our house last night in a brand new Mercedes 230 with like three miles on it.
I will be so glad when Spring is over and gone and reality finally bites people on the ass, that the salad days are gone and not coming back any time soon. Meanwhile I keep thinking of that lucky renter whos' got the deal of the century for 3k a month.

At 2/19/2006 12:17:00 PM , Blogger moonvalley said...

The comments about the house as Credit Card! OMG, no wonder people are in trouble.

At 2/19/2006 04:01:00 PM , Blogger Athena said...

This comment has been removed by a blog administrator.

At 2/19/2006 04:07:00 PM , Blogger Marinite said...

I think Sonoma is going to get hit harder than say Marin because like you say, the average yearly income is not that high and I personally think those folks who buy during the last few years at these absurdly overpriced prices are buying vacation homes or investment homes...second homes regardless of what you want to call them. Second homes are the first to go during bad times.

Marin Real Estate Bubble

At 2/19/2006 04:34:00 PM , Blogger Athena said...

I believe you are correct Marinite. Marin enjoys the location location location advantage. The closer you are to SF and to areas where 6 figure incomes are not uncommon the more desirable it will be to live there. I lived in greater Sonoma county while commuting to SF for a couple of years and it was brutal. I finally just moved to Southern Marin and of course doubled my rent, but it was worth it because I was 15 minutes away from my SF office and had the best of both worlds. I lived in a burb but was close to work, and I made great money.

Sonoma does have its commuting class of folks, but clearly by the average income statistics it is not a very large group.

I know at my company I am pretty much the only person in 6000 that lives that far north. People talk to me about my neck of the woods like they are talking about Oregon. LOL...

I think Sonoma is going to get hit pretty hard too because there just isn't enough in the economy to justify the prices much longer, or to bring in a new group of next gen buyers.

We shall see... I know the papers are strangely quiet... downright mum. In fact the real estate section has some articles all saying this is a great time to buy a second home...

now who are they writing that for? Who is left that can afford it?

At 2/19/2006 06:14:00 PM , Blogger moonvalley said...

Ok, as to the friends who bought the flipper property, they live here in Sonoma..the property they bought was in Marin!! Just found that out after a little more casual the way, in the Index Tribune this morning they were advertsing houses that i'd seen befopre for sale, only by the number of beds and baths..not by price. In fact price was nowhere to be seen unless one clicked on the house. Now what does that tell you??
We're going to tea at a friends place next weekend, an old time Sonoman. I'm going to dig for dirt there and see what I can find out.

At 2/19/2006 06:26:00 PM , Blogger Athena said...

My daughter and I went through the real estate section of the Index Tribune over brunch at Black Bear this morning.

We actually had to look at the date to make sure we weren't looking at an insert we had already seen before. All the same houses, nothing new... we drove to at least 2/3rds of the open houses and they were dead dead dead. Just the real estate agent to be seen. Even on the main touristy streets like W. Spain. We stopped and took a couple pictures of a couple particularly humorous chitholes. The Real Estate agent at one rushed up to the window in an attempt I think to appear friendly and inviting... but we just snapped our picture and moved on. :-D

One thing I noticed in the insert is that the first two pages were devoted to big ticket properties. The ones over a million dollars. I assumed it was an attempt to lure the potential buyer into thinking this is a VERY exclusive area and trip their psychology into getting in at any price under a million... LOL... then they devoted the rest of the pages to the usual suspects that have been hanging around for a while.

There were some price reductions, and priced to sell listings of course... but our favorite was this total chithole with the great big tagline of "YOU WILL BE SURPRISED"

bahahahaha... we did drive by that one to take a picture of our own. How much you want to bet the rest of that sentence should read...

"at how much we are actually ASKING for this chithole!"

Basically, there is no amount of money unless they were paying ME that could entice me to live in that!

At 2/19/2006 08:03:00 PM , Blogger marin_explorer said...

"I did this the other night in Burlingame... a girlfriend and I met for dinner and every new hummer, suburban, escalade driving buy we took a stab at how much they owe on their mortgage, from their last refi to get their new wheels."

Visiting downtown B. the other day, I noticed all those chíc stores and wondered how much credit keeps these places humming along. How prevalent is that game where debt is accrued simply to look wealthy, at the risk of long-term financial instability? What happened to saving for the future?

Sure, we hear about strong consumer confidence, but to what degree is that propped up by the ability to spend versus having the actual means? Similarly, I suspect paper gains in real estate are giving the illusion of a bright future of windfalls, looping back to that spending cycle.

Looking ahead, what do we see for homeowners, local economies and governments? It's bound to get messy, whether we live in Sonoma, Marin, or elsewhere.

At 2/19/2006 08:45:00 PM , Blogger Athena said...

Sure, we hear about strong consumer confidence, but to what degree is that propped up by the ability to spend versus having the actual means? Similarly, I suspect paper gains in real estate are giving the illusion of a bright future of windfalls, looping back to that spending cycle.

Looking ahead, what do we see for homeowners, local economies and governments?

Great questions... and good observation. It has been all paper gains. People HAVE been using their houses as low interest rate credit cards, they HAVE used the old house as their personal and private ATM. They have NOT saved any money. We are negative when it comes to saving rates.

People are having their cake and eating it too... because they don't get a statement every month that looks like a credit card statement- because they don't get a notice telling them they are at the limit... people spend like the sky really IS the limit.

That whole real estate only goes up, we are on target to do 15% in appreciation crap that keeps being circulated like a peace pipe at a pow-wow keeps people spending like the money is in the bank.

But its NOT in the bank, and I bet soon it won't be in the house either. People have had the view that their house is their big retirement savings account, and yet they ignore that they are spending that account hand over fist, but like chumps they believe that the appreciation is guaranteed and they blindly hope that if they sell it- buyers will come.

What do I forsee?

Well, I think that prior to the exotic erotic financing craze the lending restrictions were in place because there were some pretty good statistics about the risk associated with giving big mortgages to subprime borrowers.

now we have a whole segment of our economy accounting for a huge chunk of our GDP in the hands of subprime borrowers with risky, loans full of teeth and claws...

We have regular run of the mill middle class folks who had stars in their eyes and leveraged their equity to buy sure thing second residences to flip...

we have pure speculators running into locations that are "prime" for increase and altering the price environment with nothing but their speculative irrational exuberance...

I think we will see a long running episode of Financial Follies and we will want to laugh, but unfortunately we will know too many people by first name and we will know their stories and it will be bad form to laugh when they are present... and we will feel guilty for doing it behind their backs.

At 2/19/2006 09:18:00 PM , Blogger moonvalley said...

Ah, we were in The Black Bear this afternooon, after the Woody Allen movie at the Sebastiani.
A friends big house on West Spain is still up for sale. he told us he sold it to a guy way back last year at a tidy profit, the guy has been trying to flip that house since forever. It's very sad seeing that lonely RE agent at his sad little card table all alone every Sunday. Maybe we should bring him cookies.

At 2/19/2006 09:36:00 PM , Blogger Athena said...

or a nice cobbler from Black Bear! Now why didn't I think of that?

The valley was strangely quiet today that is for sure... open houses all over the place, but not much traffic.

How many real estate agents are in Sonoma anyway? Do you know?

I am sure that at this point there is not nearly enough houses being sold to justify the bodies.

At 2/19/2006 09:42:00 PM , Blogger Athena said...

There is a house on Los Banos that also seems to be sitting and sitting. There appears to be a perpetual open house going on. the house backs up to the school yard of Alta Mira... can't imagine that would be a good thing during school days.

But anyway- it is a total case of homedebtors living like renters and expecting the returns of investment bankers.

The inside, good grief, they painted trying to effect the pottery barn look, but couldn't be bothered to make sure the paint line even made it even with the ceiling... and apparently they are too cheap to spring for some crown molding to hide their lack of attention to detail.

I wouldn't pay $200k for the darn thing and there they are wanting something in the neighborhood of $600k.

oh well, can't wait to see who the big bag holding fool will be...

At 2/19/2006 09:54:00 PM , Blogger Athena said...

bahahahaha... this is one of the funniest things I have read all day!

By SD_suntaxed over at:

You put your payment in
You pull some equity out
You crank that 10K stereo up
and you shake it all about

You do the Hokey-Pocus
and you flaunt it all about.
That’s what it’s all about!

You put a HELOC app in
You pull an Escalade out
You take a 3 week cruise
and all of it’s on the house!

You do the Hokey-Pocus
and order a home theater while you’re out.
That’s what it’s all about!

You pull your Cayenne in
and empty your mailbox out
Higher payments have kicked in
on those rates you heard about

You do the Hokey-Pocus
and another refi to bail you out.
20% appreciation forever, without a doubt!

You put your 401k in
The developer is pulling out.
No renters want to move in
for what you’re shelling out.

You do the Hokey-Pocus
but forclosure sharks are still circling around.
How’d this come about??

At 2/23/2006 06:24:00 PM , Blogger Athena said...

oops... deleted my comment by accident. Reposted though out of order now.

Somone GOT 3k a month from a renter in Sonoma? Wow.... I wonder for how long they will have renters like that. One can get a nice east side remodeled house 3/2 for under 2k. Right now the highest for rent listing in all of Sonoma Valley is 2500 per month for a house up Buena Vista. It is beautiful, and also has been fully remodeled, hard wood floors, granite countertops... the works. It is nice and I think it is a flipper real close to the trouble line.

It is listed by a real estate company for rent... and if the rent were 1000 less I would rent it myself. But there is just no reason to be paying that much for anything in Sonoma because there are many other options. I am watching it and waiting to see how long it sits without a renter.

Renters who will pay that much are such a minute profile I can't even think of who might fit such a profile. Clearly somone must make 3x that much in a month, and while I know plenty of people like that- they work in places that are NOT an easy commute from Sonoma. I have a commute, and am fortunate that my company is flexible I can work at home as well, but how many people work for companies like that? AND happen to have a hankering for living in Sonoma?

Moonvalley... LOL... that house as a credit card item is priceless. However, I wish I could say it was uncommon. Look around just our quaint little town. I should meet you for coffee one morning and we can play the price is right with people's mortgages.

I did this the other night in Burlingame... a girlfriend and I met for dinner and every new hummer, suburban, escalade driving buy we took a stab at how much they owe on their mortgage, from their last refi to get their new wheels.

Oh... I almost forgot THIS little baby from work the other day...

Was having a conversation with a couple of guys in my department about real estate and such...

One of them told us of his neighbor who just refinanced his house to upgrade his wife's wedding ring!!!!

OMG!!! WTF? LOL!!!!!! Refi the house to upgrade the bling!!!

Where is a picture of someone rolling on the floor laughing? How do you even wake up in the morning and look at yourself in the mirror knowing that you refinanced a house to buy a bigger ring?

4:01 PM

At 2/24/2006 01:42:00 PM , Blogger Athena said...

This was too good to pass up... story from Foose over at Ben's place

Comment by Foose
2006-02-24 13:01:08

My coworker just made his first sale as an amateur RE agent last week. He keeps asking me when I’m going to buy. I just heard his sad story today and I had to write it down. He has 30K in credit card dept. He put down 15K on a new house in Bakersfield and $1000 on one in AZ. The bakersfield home is nearly finished and he is worried about finding a buyer. I asked him if there was any competition in the area and he looked confused. I told him that inventory was going up and he was so surprised. He had no idea about current trends in inventory all over the country. He’s looking for a third job for extra money. He thinks he can make extra money being a striper. Mean while he has a wife and two kids at home with no clue. My favorite quote from him is “RE always goes up” as he waves his had through the air up and down to describe RE trends. This guy is a professional engineer but he has no common sense. He’s also taking classes to get his brokers license.

At 2/24/2006 09:28:00 PM , Blogger Athena said...

From an OC resident at the place to be

OC Homeowner Says:

February 24th, 2006 at 10:19 pm

OK, In a former thread I explained how a commercial tenant of my husbands boss’ was being evicted because she had not paid the rent in 4 months and how she was a Real Estate Broker. Well she is gone and they are trying to lease the now empty building. Today while my husband was there doing some other business (his boss owns 4 buildings in a row and uses one of them himself for one of his businesses) a distributor pulls up (lets call him Joe public) and asks my husband what happened to the former tenant?
My husband explains that she was evicted because she could’nt pay the rent, that she is a realtor and because of the housing market they haven’t sold any houses in months. This guy (Joe public), looks shocked and says “What do you mean? The housing market is hot right now.” Well my husband quickly gave him an education


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