Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Tuesday, March 28, 2006

Bubble...I mean Butter on Your Toast?


Press Democrat

"Apparently in Sonoma County home builders are preparing for another busy summer after wrapping up their best year since 1999."

"Residential construction is expected to continue at a brisk pace this year, despite the recent slowdown that has put the brakes on sales of new and existing homes."

"Rising interest rates and soaring prices have pushed some buyers out of the housing market. But builders remain optimistic they will be able to sell their projects and are not planning price cuts."

"Prices up there are holding pretty well," said Cindy Siwecki, a longtime analyst of new home construction and sales in the Bay Area with the Reiser Group. "There's more people moving up there and commuting. As long as there's jobs being created there's going to be demand for new housing."

LOL Cindy! Did you not read the Sonoma County jobs outlook? Keep reading... its down below.

"Residential construction activity hit a six-year high in 2005, when builders started 1,530 homes and 1,303 apartment units in Sonoma County. Buyers in search of new homes have more choices than in recent years, when intense competition sucked up already dwindling inventories. Now it's home builders who must compete for sales."

"What's more true today than it was last year is you have to offer a competitive price and a competitive home," said Chris Peterson, co-owner of Rivendale Homes, a Santa Rosa home builder. "I don't think anybody's going to stop what's in the pipeline. It's just going to be competitive and that's good for the consumer."

Right, because now the current 5 month supply of homes is in competition with you for your new homes... and what are y'all competing for? Right, those 7% of Sonoma County households that can still afford to buy a house. Did you miss that part about the rising interest rates and the soaring prices that have pushed buyers out of the market? Keep reading...

"New home prices could flatten in some markets, but economists forecast a 5 percent to 8 percent increase statewide. Overall, residential construction in California is expected to drop in 2006 from near-record levels in 2004 and 2005. But the number of new homes and apartments could still top 200,000 for only the third year since 1989, according to the California Building Industry Association's forecast."

"The decline in construction activity will be centered in the state's high-cost coastal regions and urban centers, including Sonoma County, where builders are scaling back plans to build larger, pricey homes."

Scaling back? Did someone do a little demographic and income research for the county? Oh- or maybe they looked at the burgeoning MLS listings?

"But many of those same areas should get a boost from continued expansion of town home and condominium construction as builders put more housing on increasingly scarce developable land, according to industry economists. The county's home building resurgence is largely a result of more builders' catching up with demand after running out of homes to sell in the past couple of years."

"Another boost is the release of more land blocked by the endangered California tiger salamander. Federal officials last year approved a plan by builders, environmentalists and government agencies to set aside large areas of central Sonoma County for salamander habitat, to be largely paid for by residential and commercial construction."

Phew... glad they got that taken care of. They're not making any more land you know.

"Builders, though, don't anticipate a flood of new housing given city growth control ordinances and urban growth boundaries that have shaped the county's development for more than a decade. Still, the projects planned will give a significant boost to the supply of new homes in a county where resale housing has increasingly met buyer demand."

I agree with the part about the projects planned giving a significant boost to the supply of homes for sale... they will add to the number already hanging around on the market. I am not sure if the author just felt better adding that gratuitous demand statement, but since the unsold supply has grown and sales have dropped by BIG % in most of the county, it begs the question... Donde Esta the demand?

"Ryder Homes is completing its Vintana development in Windsor, which it began seven years ago, and will start construction this fall on Avila Ranch in Petaluma. Already this year, Ryder completed the final homes in its Main Street infill home development in Cotati."

"Phil Trowbridge plans to start construction this year on the 94-home Kawana Springs project in southeast Santa Rosa as the developer enters the final phase at Vintage Greens in Windsor. That subdivision opened five years ago and 100 more homes are planned there this year."We've been selling about four a week. That's very good," he said."

hmmm somehow these numbers aren't really showing up in the homes sold reports.

"The county's largest builder, Christopherson Homes, is working on six projects this year that will have 446 homes when completed. More than a third of the units will be town homes and live-work units."

"Thiessen Homes was at the forefront of thinking small in Sonoma County when it opened Town Green Village in Windsor four years ago. This year the company expects to near the 200-unit mark of the project's planned 250 condominiums and row houses."

But they don't expect a flood of new housing on the market...

"Town Green Village has gained acclaim for combining residential and commercial units in mostly three-story buildings. It is the model for three other mixed-use projects Thiessen is planning elsewhere in the county."

"Row houses are the latest addition and reflect the efficient land use at the center of the Town Green Village design. Thiessen said he can build very livable row houses with decks and garages off alleys at 25 units per acre, compared with the 5 to 10 houses per acre in a subdivision."

Ah, a home buyer's dream... a row house. By the sound of it they will be close enough together that you can ask your neighbor for a roll of toilet paper and he can probably just hand it right in the window to you. Nice. Very Nice.

"Another goal is building more affordable housing. The two- and three-bedroom row houses sell in the $449,000 to $498,000 range, well below the county's median home price of $556,000."

"Apartments can be the only affordable option for many. Construction of new apartments has slowed in Sonoma County, in part because rents have been flat for several years."

"Residential construction is resurgent across Sonoma County.Economists forecast a 5 percent to 8 percent increase in new home prices statewide."

hmmm... but what do they say about home prices in Sonoma County? Last time I checked, the economists watching the Sonoma County market called it over-valued somewhere between 30% and 50% and predicting price declines. Speaking of overvalued and price corrections... lets look at creative lending in Sonoma County...

"Rising interest rates are cooling the housing market this year, hitting hardest buyers who relied on adjustable-rate loans to stretch financially and get into ever more expensive homes."

Oh NO! Say it isn't so... but what about all those new houses that were so in demand?

"The lending industry has been creative in coming up with loan programs to help buyers stay in expensive housing markets such as Sonoma County. Adjustable-rate mortgages accounted for nearly 70 percent of all new purchase loans in the county last year, compared with 15 percent in 2001."

"Interest-only loans accounted for about half of all home purchase loans last year, compared with 2 percent in 2001, according to LoanPerformance, a mortgage information company."

'"Now it's getting harder to qualify buyers. We had to figure out a way to get them into that property," said Joan Picard, senior loan officer for Cal-Bay Mortgage in Santa Rosa and president of the Redwood Empire Mortgage Lenders Association.'

"Most popular have been interest-only loans featuring lower, adjustable rates that are fixed for an initial period, often 3 or 5 years. Buyers get lower monthly payments and count on rising home values to build equity rather than paying down mortgages. Before the interest rates become adjustable, they plan to sell or refinance into a longer-term loan with a better, fixed rate. But those initial rates are no longer a great deal."

"A year ago, such an interest-only loan would feature rates 1.5 to 2 percent under that for a 30-year, fixed-rate loan. That spread has disappeared. Buyers could find it increasingly difficult to qualify for a loan with a rate in the low 6 percent range, compared with rates in the low 5 percent range a year ago."

"Federal money managers have been raising short-term interest rates to keep inflation in check. Lenders report a resurgent refinance market as more homeowners get out of various adjustable-rate mortgages to lock in today's rates long term."

"While there has been a slowing in purchase lending, Martinez said it's not dramatic. To help more people get into homes, Redwood Credit Union is offering two new adjustable-rate mortgages promoted by the credit union industry. One resets the interest rate every two years. Another is fixed for three years at 1 percent below the national rate for similar loans."

"Loans offering monthly payment options have soared in popularity in the past year when buyers faced double-digit annual home price increases. The main attraction is a minimum payment option that doesn't even cover the monthly interest due, also known as negative amortization. This loan's other options range from interest-only and 30-year principal and interest payments to a 15-year principal and interest payment. But buyers must be comfortable with a loan, particularly if they are making minimum or interest-only payments or face sticker shock when interest rates rise, lenders said."

"Does the buyer fully understand the loan they're getting? That's my job," Picard said.

The latest addition to the menu of loan choices is the 40-year loan. It reduces monthly payments by amortizing a loan over an even longer period than the traditional 30-year loan."The 40-year loan reduces their short-term monthly payments. The benefit over interest-only loans is that it enables the borrower to pay down principle, avoiding deferred interest," said Scott Sheldon, a mortgage advisor with Financial Company of America.

Are they really pimping these mortgages in this article? For a reality check and to avoid the temptation to become another housing bubble casualty see the Expert.

The truth about the 40 yr. mortgage

Just a snippet for you:

$400,000 at 5% 30yr fix = $2147.28 . . .total pmt = $773,023
$400,000 at 5% 40yr fix = $1928.78 . . total pmt = $925,817
$400,000 at 5% 100yr fix = $1678.09 total pmt = $2,013,709

$400,000 at 6% 30yr fix = $2398.20 . .total pmt = $863,352
$400,000 at 6% 40yr fix = $2200.85 . .total pmt = $1,056,408
$400,000 at 6% 100yr fix = $2005.04 .total pmt = $2,406,048

$400,000 at 7% 30yr fix = $2661.21 . . .total pmt = $958,035
$400,000 at 7% 40yr fix = $2485.72 . . .total pmt = $1,193145
$400,000 at 7% 100yr fix = $2335.50 . total pmt = $2,802,600

"Whew, lots of things we can learn from these numbers."

Check out these ARMs or perhaps ARM adjustments...

Or maybe with all those new jobs in Sonoma County we won't have to worry about those 70% of buyers who used ARMs last year to finance a house. Maybe rising salaries will compensate and there will be a soft landing after all? Lets read the Press Democrat news and find out....

"Jobs are much easier to come by now than they were two or three years ago. But with little job growth in wealthy sectors of the economy such as high-tech manufacturing, workers are having a hard time finding salaries that match what they made during the dot-com boom years. Instead, many workers previously employed by high-tech companies have switched to careers in health care, hospitality or retail, which are stable but not nearly as well-paying."

"As the North Bay economy continues to muddle through a sluggish recovery from the high-tech recession, employees have yet to see any significant increase in wages -- and they likely won't in the coming year."

"You would see maybe good job growth, but not as strong wage growth, because those are historically lower-paid sectors that are growing," said Jean Ross, executive director of the California Budget Project, a Sacramento advocacy group for poor and middle-income families.

"I think we're looking at probably a modest year in terms of the overall health of the economy, which likely translates into a modest year for wages. And I would probably say I see more downside risk than upside risk at this point."

Downside risk? Not a good sign.

"Adjusted for inflation, per capita wages will increase 1.9 percent in 2006, after an estimated drop of 2.6 percent last year, according to research by the Center for Regional Economic Analysis at Sonoma State University."

"The per capita income in Sonoma County last year was about $37,384, down slightly from the previous year and less than $1,000 higher than 2000, according to the Sonoma State report."

No wonder people can't afford the home prices. So why were prices rising when wages were falling? Oh, right... I remember, because those thoughtful mortgage brokers just had to do something to get these poor people (and I mean that literally) into a house. Thank goodness they had risky mortgage products to serve the need of 70% of the buyers last year, or those homes would still be sitting there on the MLS. What do-gooders!

"In 2006, economists are estimating per capita wages to rise to $39,247."

Yippee... that extra 2k a year is going to come in handy when the ARM adjusts.

"In the boom years of the late 1990s wages were growing more than 3.5 percent every year, and in 2000 they climbed 8.2 percent. But when the dot-com bubble burst, wages began a decline and have only recently started to recover again."

"Obviously, high-tech jobs are important. But you have to look at the mix of jobs," said Nari Rhee, a doctoral student and wage analyst at UC Berkeley. "We need to look at the service jobs there and make sure that people who have those jobs can afford to live here. It's important to look at attracting high-wage jobs in dynamic industries, but you have to look at what we've got to work with and improve what we have."

"Analysts aren't optimistic that wages will see much improvement in the coming year, especially with employers reluctant to boost pay while the economy is still slow to recover. The high-tech sector is still doling out layoffs, and the jobs replacing those lost often don't pay as well."

"Job counselors throughout Sonoma County said they deal with many clients who could find work -- but are unemployed because they can't find a job that pays the salary needed to support the lifestyle they're accustomed to."

'"We have some candidates who cannot be placed because their pay rates are too high," said Tara Kellett, a staffing manager at Professional Staffing Resources in Santa Rosa.'

"Some people just cannot live on a $12-an-hour salary, and that's getting your foot in the door at a lot of places."

"Martin Bennett, executive director of New Economy, Working Solutions, a Sonoma County advocacy group that deals with labor and employment issues, said even with the local economy a year out of recession, he still regularly sees former high-tech workers who are re-training for jobs in fields that pay less than half of what they made at the height of the dot-com boom."

"The shrinking jobs, particularly in manufacturing, paid significantly more than the new jobs being created, specifically in the service sector," Bennett said. "I see more and more folks that were laid off from what I think are good manufacturing jobs in the high-tech sector, and they're going into nursing and all sorts of unrelated fields, and these are jobs that pay $15 to $20 an hour."

"It's a problem the county has been dealing with for five years, since the economy dropped into recession. But economists had hoped that wages would have started climbing again by now."

"Sonoma State economist Robert Eyler said it's somewhat distressing that wages aren't keeping up with job growth. Such stagnation can only go on for so long before it starts affecting people's spending habits, Eyler said, noting that he's forecasting only marginal increases in retail sales over the next year as wages remain stubbornly low."

Somewhat distressing?

"Especially when taken into account alongside increasing energy prices and what could be a faltering housing market, wages could have a significant impact on the health of the overall economy."

You think? But those low wages didn't stop them from getting mortgages...

"What's driving them (retail sales) if personal incomes are pretty much flat and jobs are pretty flat and interest rates are rising?"

Eyler said. "People are eating their wealth to continue consuming."

I think he meant they are refinancing their houses and taking out HELOCs to keep that lifestyle they are accustomed to living... what do you think?
Remember this from the previous Sonoma article?
"With appreciation slowing, foreclosure activity is on the rise because households facing financial trouble may have more difficulty selling homes.The number of default notices sent by lenders to California homeowners increased more than 15 percent at the end of last year compared with a year earlier. The number of foreclosure notices in Sonoma County increased 32 percent, according to DataQuick Information Systems."
But don't worry, you can get a second job...

"Steve Cuevas was working for Catholic Charities last June when he got a phone call about a new job on a Thursday, went in for an interview the next day, and by Monday had an offer."

"From his perspective, the job market's looking pretty bright."If you really want a job, you're going to find one, even if you have to start out with low pay," said Cuevas, who makes about $13 an hour as an outreach worker at Southwest Community Health Center and still works weekends for Catholic Charities."

"North Bay employment analysts say Cuevas' experience is typical in the current job market, where relatively low-paying positions are dominating job growth and keeping unemployment below 4.5 percent, well below the national average of 5 percent."

'Robert Eyler, director of the SSU economic center said,"The wine industry has no incentive to see any major increases. Tourism is the same."'

"Banking and real estate are going to, in fact, lose jobs this year, I would say." (Eyler)
"Forecasts for the construction industry are a mixed bag. Eyler's report points to an expected drop in housing prices that could lead to a significant loss of jobs in construction and the real estate industry as a whole."

"With local high-tech employers still doling out layoffs late last year, job analysts said they don't expect much growth in 2006 as companies continue to stabilize."There still are some high-tech layoffs," said Young."

"Job growth has, in fact, been unimpressive -- Sonoma County added only 1,000 jobs in 2005, according to a report from the Center for Regional Economic Analysis at Sonoma State University."

"The county lost 800 manufacturing jobs over the 12-month period ending in November, mostly in high-tech, according to the state Employment Development Department."

20 Comments:

At 3/28/2006 12:17:00 AM , Blogger moonvalley said...

interesting about the busy homebuilders. We were in Della Santinas for lunch today and happened to overhear part of a conversation, one man was chuckling and describing for another, loan fraud. All the stuff we've read about on the bubble blogs. He was talking about how the government was working in collusion with the banks, how when houses were repossessed the property just flowed back to Freddy and Fanny . It goes from the right hand to the left hand he laughed. Then he started to talk about the Chinese, and the purchasing of our debt. There was so much I couldn't hear since I came in in the middle of the conversation however it ended with the other guy saying "so, you're interested in storage facilities?"
Looks like the end times are here. Toast indeed.

 
At 3/28/2006 12:21:00 AM , Blogger Athena said...

oh and I heard a German investment bank was dumping their RE investments. funny... there was a german investment house snooping around here the past month... I bet they made the rounds to all the blogs, especially the data intensive ones while they were calculating their risks.

Too bad Joe Schmoe doesn't do a little research before hanging himself out to dry.

What was it that one of Patrick.net (s) illustrious posters said?...

Something about a fool and his money are soon parted, and a bigger fool parts with his even quicker...

 
At 3/28/2006 12:25:00 AM , Blogger Athena said...

Oh and did you also see over at Sacramento Landing's blog apparently Open Houses are so passe!

According to statistics only 1-2% of sales are through open house and old timers in the industry don't like to do them.

I guess the professionals in Sonoma didn't get that memo since I went through town last THURSDAY even and saw open house signs, and real life agents standing watch like lone sentinels.

Thursday open house? Plus there was the usual weekend suspects... but Thursday?

 
At 3/28/2006 01:05:00 AM , Blogger moonvalley said...

we're moving in about three weeks to a bigger place....(rental of course) and our current rental is being put up for sale by our late landlords' family for 4 million bucks....wanna bet how long it will take to sell????
They think developers are just gonna snap it up.

 
At 3/28/2006 06:47:00 AM , Blogger Rob Dawg said...

The builders won't sat it but they are having closeout sales. They don't want to be left holding the last new home anymore than anyone else does. The rule in the HB industry is to rush anything that's broken ground to completion so they can lay off half the sales staff and most of the construction crews. The giveaway will be "available now." They won't be selling "on the pinks" because they won't be building by the fall.

 
At 3/28/2006 07:20:00 AM , Blogger sf jack said...

The income figures as compared to house prices in Sonoma just continue to amaze me:

"The per capita income in Sonoma County last year was about $37,384, down slightly from the previous year and less than $1,000 higher than 2000, according to the Sonoma State report."

 
At 3/28/2006 09:36:00 AM , Blogger Athena said...

SF Jack- you know it never ceases to amaze me how ignorant many Sonoma County residents are of the state of economy in their own community. I have been following the jobs landscape for the past 10 years....(part of my job) and yet I know lifelong Sonoma residents who are oblivious to the average wage, the opportunity for jobs etc... When I am having those conversations with friends and they are convinced of their wisdom in purchasing $800k bungalows fully believing in the housing fairy, that if they leverage themselves down to the last penny, in a couple years they will be richly rewarded when a foolish buyer comes along and begs to give them $1.2 million.

I ask... where are those buyers going to come from? They don't know. They respond with that wonderful cliche... everyone wants to live here. They're not making any more land you know.

LOL... I lost my composure the other day when a good friend said that. I looked at him straight in the face and asked: "Oh really? Tell me Cowboy, just when WERE they making more land? When WAS the last time they were making more land?"

He just looked at me like I had three heads. Don't know if he got the point down deep or not.

MV... $4 mill? good gawd. I have some friends who call me whenever it rains to see if their Schellville property is flooded. They don't live in Sonoma, and have inherited the property and don't visit. I remind them every time they call that schellville floods after 15 minutes of rain and why don't they sell their property if they are worried about it? LOL... they say that they are holding out till the market peaks (bwahahahahahaha) because they think they will make $10 million.

 
At 3/28/2006 09:45:00 AM , Anonymous tom stone said...

loan brokers can only sell th products that lenders come up with,and a lot of the $ that has been out there came from overseas where it was borrowed at 1% or 1.5%...look at the margins they got on "secured" loans and you can see that they could make good $ even given a high cost of sales and a big default rate...i would love to borrow at 1%,and wholesale at 3 1/2 %,or more.

 
At 3/28/2006 09:47:00 AM , Blogger sf jack said...

Interesting.

"... they say that they are holding out till the market peaks (bwahahahahahaha) because they think they will make $10 million."

= Greed

Take the money off the table!

[or off the floodplain, in this case]

 
At 3/28/2006 09:57:00 AM , Blogger Athena said...

Tom- no doubt the brokers made $. That is why they are so happy to do whatever it takes to get someone who can't afford a house to buy one anyway. We will see where those jobs go though... I wonder how many of them leveraged themselves into houses they also can't afford but for banking on double digit appreciation.

Can't say that I will feel too bad being that they had all the data for the county fundamentals at their fingertips and chose to ignore it... no matter how great they think their lending products are, if there isn't a sustainable market for the product it isn't going to be all sunshine and roses for very long...

 
At 3/28/2006 10:03:00 AM , Blogger Athena said...

Little tidbits from over at Ben's blog...

“Nevada ranks second in the nation at 61.3 percent, behind only California (69 percent; in 2004, it was 46 percent), in the percentage of potentially negative-amortizing mortgages, including interest-only and products with ARM options, according to the FDIC. Nationwide, 49.5 percent fall into that category. ‘ARMs tend to have a higher rate of foreclosure,’ said an official from the MBA.”

CNN Money reports on lending trends. “Millions of mortgage borrowers are entering their ‘danger years,’ when delinquencies peak and owners risk losing their homes. Delinquencies have historically reached their highest points during the third and fourth years of mortgages, according to Doug Duncan, chief economist for the Mortgage Bankers Association.”

“The number of Americans affected by the coming danger years could be huge. Half of all mortgage loans are three years old or less, according to the MBA. Nearly $3 trillion in mortgages originated in 2002, $4 trillion in 2003 and $3 trillion again in 2004.”


http://tinyurl.com/npw3t

 
At 3/28/2006 12:59:00 PM , Blogger Marinite said...

For your graphic you should use that Virgin Mary toast:

http://tinyurl.com/mqr63

It simultaneously comminicates the future history of this housing bubble and the true believers in "it's different this time".

Maybe I'll use that as my blogger profile pic.

 
At 3/28/2006 01:43:00 PM , Blogger moonvalley said...

For your graphic you should use that Virgin Mary toast:
What a brilliant idea Marinite!

 
At 3/28/2006 03:19:00 PM , Blogger Athena said...

well you guys.... that IS a fabulous idea, and I have been trying to update the picture for the past two hours but blogger is not cooperating. It says it is done and yet it won't actually insert the picture... or it times out and give me the cannot find server message.

 
At 3/28/2006 07:09:00 PM , Blogger moonvalley said...

I think it's really going to be interesting to se what happens here after we move out. The heirs (who don't live in Sonoma) dream of selling the property to a developer who will chop it up for MacMansions and give them 4m. Everyone I've spoken to says that's not likely to happen these days.

 
At 3/28/2006 07:16:00 PM , Blogger Athena said...

I can't imagine that it would be likely. We already have fledgling developments around Sonoma... that seem to be taking a LONG time to even finish building don't you think? And even fewer people milling around looking to buy them. There is no shortage of housing in Sonoma. There is a shortage of people who can afford to buy in Sonoma.

Looking at the jobs report and average incomes, apparently they aren't making anymore buyers you know... ;-)

 
At 3/28/2006 07:42:00 PM , Blogger moonvalley said...

they aren't making anymore buyers you know... ;-)
Haha. No kidding! Especially on the East Side. I've already heard from the neighbors that any sort of development is not going to be welcomed.

 
At 3/28/2006 10:12:00 PM , Blogger Athena said...

no... a new development on the east side will compete with the FB's trying to unload their $800k 1930's cottages to the dwindling supply of bigger fools...

 
At 3/29/2006 01:10:00 AM , Blogger moonvalley said...

well, we're moving into a bigger house, for the same money and just sitting and waiting for the air to go out of the bubble to pick up something tasty.

 
At 3/29/2006 09:15:00 AM , Blogger Athena said...

sounds like a good plan! It will be interesting to see how long it takes before the people in sonoma become aware of what is happening. I find the silence deafening. The Sunday real estate section is so mute that it screams of avoidance. You just can't make this stuff up... LOL... how does a community actually form such collective denial?

 

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