To Bubble or Not to Bubble... is that the question?

I hear it over and over again from friends, friends of friends, neighbors, perfect strangers even...
"There is no housing bubble."
"Sonoma is different."
"It is all about supply and demand, and there is more demand than supply in Sonoma."
"Real Estate only goes up."
"You've got to get into the market some way, some how, buy, buy, buy now, buy east side, buy as much house as your budget can stretch. You can do it- get an $800,000 I/O with nothing down. Do it now, or regret it later. Real Estate only goes up, you can't lose."


Really? No Bubble? I consider prices elevated more than 10 times the average person's income to be pretty bubble like. When the only way for the average hockey puck to "get into the market" is with a risky subprime I/O mortage I would say that is pretty fanciful bubble like.

According to the Press Democrat:

“Only 7 percent of households could afford a median-priced home in Sonoma County at year’s end compared with 12 percent a year ago. "

1. When only 12% of a population can afford a median priced home, you have issues.
2. When an already basementlike number of 12% drops by almost half in ONE YEAR you have more than issues... you have problems.
3. When you have bubble headed sheeple running around saying buy, buy, buy get into the market any way you can before you are priced out forever- you have a bubble.

More from the same PD article:

A Sonoma County household needed a minimum income of $152,595 to buy the typical home, based on prevailing interest rates for a 30-year mortgage. A year ago, the minimum income needed was $124,650.

Did I mention that little thing about the actual income of the average Sonoma hockey-puck?

Average Household Income
$46,149


So what are the sheeple to do?

Oh- let's let the Press Democrat tell you:

"Buyers had to increasingly stretch financially to purchase homes.
A majority turned to interest-only and other adjustable-rate loans, often making little or no down payment when purchasing homes.
Adjustable-rate mortgages accounted for 69 percent of loans to buy Sonoma County homes last year and only 31 percent were 30-year, fixed-interest loans - a reversal from just two years earlier.”

http://www1.pressdemocrat.com/apps/pbcs.dll/article?AID=/20060116/NEWS/601160377/1036/BUSINESS

Where was I?

4. Important stat to remember: 69% of loans to by Sonoma County Homes JUST in the last year were Interest Only Adjustable Rate mortgages.

What's the problem with that you ask?

5. 2006 and accelerating into 2007, as much as $2.5 trillion worth of the "exotic" I/O ARM loans will reset. No more interest only. The real deal sets in and that payment can go way up.

"We don't have enough data to know how big a problem this will be," said David Berson, chief economist at Fannie Mae, the nation's largest mortgage packager."

Do you hear a ticking sound?

According to Paul Kasriel, chief economist at Chicago-based Northern Trust, "the household debt-service ratio is bound to climb to new highs," Kasriel wrote last month. "Asset bubbles are characterized by cheap credit. Usually what bursts a bubble is higher cost of credit, because that is what inflates the bubble, is cheap credit."

Fannie Mae looked at 2002-2004 loan data to determine what portion of the existing loan pool would be "adjusted," and when. Fewer than 10 percent of the conventional conforming loans will reset in 2006-2007, but nearly two-thirds of sub-prime loans will. That is because a large portion of the sub-prime loans are two-year adjustables, says Berson, the Fannie Mae chief economist.

Just one example of what the industry calls a "2-28," an ARM in which the interest rate is fixed for the first two years and then adjusts regularly for the next 28 to whatever index the loan calls for. The average yearly cap on this loan is 2.3 percentage points per year.

Roughly speaking, a consumer's monthly bill could rise from $330 to as much as $1,425 to $1,755.

Mortgage Bankers Association, senior economist Michael Fratantoni is more interested in the five-year adjustables that were issued during the refi craze of 2002-03. That's a large crop that will sprout in 2007.
"The estimate is that in 2007, more than a trillion dollars worth of hybrids are going to hit their first reset date," he said.

That one chunk of hybrid loans represents 12 percent of the $8.8 trillion in single-family home loans outstanding nationwide.

Now lets remember here, that while these are national figures- Sonoma has 69% of the loans in just the past year tick tocking away as you read this... What is the impact?

"Consumers have become so accustomed to very liquid mortgage markets, where credit is available for almost any circumstance, that they are not aware this is unusual in the market," HSH's Gumbinger warned. "Somewhat tighter credit availability and somewhat higher interest rates are much more normal."
"Borrowers think they can always refinance. That is not always a safe bet."

So when these exotic loans reset and payments can double and triple or worse then what?

Oh right, people can't afford then to service their debt-load and they start flooding the market trying to dump their ace in the hole that only goes up.

Current data:

According to the GMAC MLS listing service there are 200+ listings for sale in the 95476 zip code. More than 4 times typical inventory.

Single family homes + duplexes/condos: 172

Just for kicks here is a little sales comparison:

Homes sold first 7 weeks of 2005 = 67
Homes sold fist 7 weeks of 2006 = 56

of the 172 current listings 45 have made price reductions, some seem serious, and some seem woefully out of touch as their gold mine languishes on the mls.

(courtesy of ziprealty.com 2/14/06)

226 W SPAIN ST, Sonoma, CA 95476
Price Reduced: 02/10/06 -- $2,275,000 to $1,975,000
Days on Market: 24

193 GUADALUPE DR, Sonoma, CA 95476
Price Reduced: 02/07/06 -- $629,000 to $619,000
Days on Market: 36

435 JACEY ST, Sonoma, CA 95476
Price Reduced: 01/26/06 -- $599,950 to $589,950
Days on Market: 38

111 W MACARTHUR ST, Sonoma, CA 95476
Price Reduced: 01/18/06 -- $450,000 to $430,000
Price Reduced: 02/13/06 -- $430,000 to $410,000
Days on Market: 40

18817 RAILROAD AVE, Sonoma, CA 95476
Price Reduced: 01/19/06 -- $649,000 to $644,500
Price Reduced: 02/01/06 -- $644,500 to $639,500
Days on Market 49

731 5TH ST E, Sonoma, CA 95476
Price Reduced: 01/03/06 -- $875,000 to $849,950
Price Reduced: 01/09/06 -- $849,950 to $849,444
Price Reduced: 02/01/06 -- $849,444 to $799,444
Days on Market: 41

609 ROSS CT, Sonoma, CA 95476
Price Reduced: 01/06/06 -- $849,950 to $829,950
Price Reduced: 01/17/06 -- $829,950 to $799,950
Days on Market: 62

17660 17662 MIDDLEFIELD RD, Sonoma, CA 95476
Price Reduced: 02/02/06 -- $1,140,000 to $1,095,000
Days on Market: 62

304 DECHENE AVE, Sonoma, CA 95476
Price Reduced: 01/26/06 -- $659,000 to $639,000
Days on Market: 69

18585 MANZANITA RD, Sonoma, CA 95476
Price Reduced: 12/20/05 -- $740,000 to $729,000
Price Reduced: 02/07/06 -- $729,000 to $699,000
Days on Market 72

18677 MELODY LN, Sonoma, CA 95476
Price Reduced: 02/06/06 -- $649,000 to $629,000
Days on Market 75

1385 BAINBRIDGE LN, Sonoma, CA 95476
Price Reduced: 12/13/05 -- $710,000 to $675,000
Price Reduced: 01/03/06 -- $675,000 to $670,
Price Reduced: 02/09/06 -- $670,000 to $669,000
Days on Market: 84

1343 E NAPA ST, Sonoma, CA 95476
Price Reduced: 01/17/06 -- $1,368,000 to $1,295,000
Price Reduced: 02/13/06 -- $1,295,000 to $1,268,000
Days on Market: 87

18015 HARVARD CT, Sonoma, CA 95476
Price Reduced: 02/04/06 -- $775,000 to $750,000
Days on Market: 88

970 GLENWOOD DR, Sonoma, CA 95476**
Price Reduced: 01/10/06 -- $679,000 to $665,000
Days on Market: 89

535 MITCHELL WAY, Sonoma, CA 95476**
Price Reduced: 01/16/06 -- $799,000 to $775,000
Price Reduced: 01/26/06 -- $775,000 to $750,000
Days on Market: 89

919 1ST ST W, Sonoma, CA 95476
Price Reduced: 02/01/06 -- $415,000 to $405,000
Days on Market: 93

910 ARGUELLO CT, Sonoma, CA 95476
Price Reduced: 01/06/06 -- $649,500 to $629,500
Days on Market: 96

920 5TH ST #M, Sonoma, CA 95476
Price Reduced: 11/16/05 -- $425,000 to $389,000
Price Reduced: 01/16/06 -- $389,000 to $373,000
Days on Market: 104

215 DEPOT RD, Sonoma, CA 95476
Price Reduced: 01/10/06 -- $565,000 to $525,000
Days on Market: 105

16880 ESTRELLA DR, Sonoma, CA 95476
Price Reduced: 02/02/06 -- $997,000 to $950,000
Days on Market: 110

17930 SPRING ST, Sonoma, CA 95476
Price Reduced: 12/08/05 -- $499,000 to $484,000
Days on Market: 117

16737 SONOMA, Sonoma, CA 95476
Price Reduced: 11/29/05 -- $635,000 to $599,000
Days on Market: 117

832 2ND ST W, Sonoma, CA 95476
Price Reduced: 11/15/05 -- $545,000 to $525,000
Price Reduced: 01/13/06 -- $525,000 to $510,000
Days on Market: 117

600 OMAN SPRINGS CIR, Sonoma, CA 95476
Price Reduced: 11/08/05 -- $669,000 to $654,000
Price Reduced: 11/16/05 -- $654,000 to $639,000
Price Reduced: 01/09/06 -- $639,000 to $619,000
Days on Market: 119

846 848 3RD ST, Sonoma, CA 95476
Price Reduced: 11/18/05 -- $897,000 to $875,000
Price Reduced: 01/17/06 -- $875,000 to $850,000
Days on Market: 119

19177 ARNOLD DR, Sonoma, CA 95476
Price Reduced: 12/05/05 -- $625,000 to $599,999
Days on Market: 121

17313 PARK AVE, Sonoma, CA 95476
Price Reduced: 01/31/06 -- $599,999 to $589,999
Days on Market: 124

162 W AGUA CALIENTE RD, Sonoma, CA 95476
Price Reduced: 01/09/06 -- $368,000 to $364,900
Days on Market: 129

842 W 2ND ST, Sonoma, CA 95476
Price Reduced: 12/06/05 -- $549,000 to $539,000
Days on Market: 132

49 S TEMELEC CIR, Sonoma, CA 95476
Price Reduced: 01/19/06 -- $589,000 to $569,000
Price Reduced: 02/08/06 -- $569,000 to $549,000
Days on Market: 138

399 DAHLIA DR, Sonoma, CA 95476
Price Reduced: 01/31/06 -- $545,000 to $539,000
Days on Market: 139

17178 SONOMA HWY, Sonoma, CA 95476**
Price Reduced: 12/02/05 -- $385,000 to $375,000
Price Reduced: 01/06/06 -- $375,000 to $329,000
Days on Market: 147

980 RACHAEL RD, Sonoma, CA 95476
Price Reduced: 11/22/05 -- $2,495,000 to $2,375,000
Price Reduced: 01/16/06 -- $2,375,000 to $2,345,000
Days on Market: 152

140 ENCINAS LN, Sonoma, CA 95476
Price Reduced: 11/30/05 -- $510,000 to $500,000
Price Reduced: 01/30/06 -- $500,000 to $495,000
Days on Market: 153

511 BAINES AVE, Sonoma, CA 95476
Price Reduced: 11/11/05 -- $535,000 to $510,000
Price Reduced: 11/30/05 -- $510,000 to $495,000
Price Reduced: 01/12/06 -- $495,000 to $479,500
Days on Market: 156

17023 SUMMER MEADOW LN, Sonoma, CA 95476
Price Reduced: 11/14/05 -- $1,249,000 to $1,149,000
Days on Market: 158

12 WOODWORTH LN, Sonoma, CA 95476
Price Reduced: 02/10/06 -- $399,000 to $379,000
Days on Market: 159

107 PINE AVE, Sonoma, CA 95476
Price Reduced: 02/06/06 -- $479,000 to $469,000
Days on Market: 181

715 BOYES BLVD, Sonoma, CA 95476
Price Reduced: 11/14/05 -- $879,000 to $849,000
Price Reduced: 02/08/06 -- $849,000 to $799,000
Days on Market: 181

18395 BARRETT AVE, Sonoma, CA 95476
Price Reduced: 01/30/06 -- $579,000 to $569,900
Days on Market: 190

17135 SONOMA HWY, Sonoma, CA 95476
Price Reduced: 01/05/06 -- $629,000 to $600,000
Days on Market: 201

290 SERRES DR, Sonoma, CA 95476
Price Reduced: 01/03/06 -- $1,650,000 to $1,595,000
Days on Market: 257

1901 FREMONT DR, Sonoma, CA 95476
Price Reduced: 02/02/06 -- $2,950,000 to $2,650,000
Days on Market: 264

16743 SONOMA HWY, Sonoma, CA 95476
Price Reduced: 11/29/05 -- $635,000 to $599,000
Days on Market: 482


Supply and Demand you say? We are already in just the beginning of the year seeing 4X the supply just from last year alone.

median value of homes in 95476 according to zillow.com is: $686,585

PRESS DEMOCRAT: Bank regulators describe a boom area as one where home prices rise more than 30 percent after inflation for three years. In Sonoma County, inflation-adjusted prices in the past three years are up 55 percent. Regulators claim far more U.S. regions are booming simultaneously today than at any time in the past 30 years. What's the potential downside of the housing boom?

http://www1.pressdemocrat.com/apps/pbcs.dll/article?AID=/20051031/NEWS/510310369/1074/business0720

I think the real question is- Do you have your parachute?