Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Monday, April 24, 2006

Ask Not For Whom The Bell Tolls....

It tolls for thee.

"For much of last year, Wall Street analysts referred to America as having a Goldilocks economy, one that wasn't too hot or too cold. Now into its fourth year of expansion, the U.S. economy might better be described as Dr. Jekyll and Mr. Hyde."

"In any given week, conflicting economic reports emerge that seem to either prove or disprove that inflation threatens, that interest rates must rise or fall, or that the nation's hot housing market is safely cooling or on the verge of collapse."

"These conflicting indicators make it hard for analysts to project the economic future. And if they can't see the way forward, what's a consumer to do?"

"For example, given the uncertain future path of interest rates, should a consumer buy a home now before lending rates rise further or wait a few months in hopes that they'll fall?"

"All expansions eventually end. Even the longest peacetime expansion, which began in March 1991, ran out of steam in March 2001. Few experts think this expansion will last that long, but few see recession just around the corner either."

"Instead, they see a confusing maze of conflicting indicators. The U.S. economy has a split personality worthy of the Jekyll-and-Hyde character in the classic Robert Louis Stevenson tale."

"On Monday, oil prices climbed to record nominal highs of more than $72 a barrel. That stoked fears of inflation and weaker consumer confidence, so Wall Street slumped."

"Then on Tuesday, Wall Street rallied because producer inflation data were tame and minutes from the Federal Reserve's latest rate-setting meeting suggested that it might raise short-term interest rates only one more time. Wall Street cheered; investors thought that after the Fed notched a 16th consecutive quarter-point hike, to 5 percent, on May 10, it would end a credit-tightening cycle that began in June 2004."

"That would put the brakes on mortgage rate increases, which have risen from the 2004 average of 5.84 percent on a 30-year fixed-rate mortgage to a national average of 6.53 percent Thursday. That's the highest mortgage rate since July 12, 2002."

"But the ``one and done'' consensus appears short-lived."

"The Fed minutes from Tuesday had showed that officials believed core inflation was flat or dropping. That no longer seemed true."

"The Fed's primary mission is to fight inflation, so the core data ``raises the likelihood that it's going to be two hikes and not one,'' said Kenneth Beauchemin, chief U.S. economist for Global Insight in Boston."

"Another quarter-point rate hike at the Fed's June 28-29 meeting would push short-term rates to 5.25 percent, influencing bank loan rates for consumers and businesses. That would complicate the housing outlook further."

"The hot housing market and cheap lending rates helped fuel much of the current economic expansion. National Realtors Association data show median home prices grew 53.2 percent between 2000 and 2005. Many economists think that steep rise reflected a speculative bubble fit to burst in the hottest markets on both coasts."

"Just about every indicator now suggests a slowing housing market, especially in California and Florida. New housing starts nationwide fell 7.8 percent in March, prices are weakening, and homes are lingering longer on the market."

"But if mortgage rates rise above, say, 7 percent, to 1999 levels, experts fear it could cause housing prices to fall, which could pull down consumer spending and the U.S. economy."

News from : "The long-anticipated housing slowdown appears to be finally upon us," wrote analyst Margaret Whelan in a research note, citing new-home sales down 21% from their July high, while new-mortgage applications are off 23% from their peak in June."

Whelan has been one of the opinion that the U.S. housing market would enjoy a 'soft-landing' scenario.

"Of late, however, the more rapid rate of decline in demand -- down 21% in eight months -- has led us to rethink our thesis for the near term," she said. "Given tough comparisons and a proliferation in for sale listings in some of the hotter markets, demand has fallen more quickly than we expected."

From Bloomberg: "New home sales fell the most since 1997, mortgage rates rose to a four-year high and inventory of unsold homes is at the highest level in a decade."

"The real estate industry was responsible for more than half the economy's expansion since 2001, according to Merrill research. It's now showing signs of slowing after the Federal Reserve raised interest rates 15 times since June 2004, to 4.75 percent from 1 percent."

"The average 30-year mortgage rate climbed to 6.53 percent last week, the highest since 2002. New home sales tumbled 10.5 percent in February to an annual rate of 1.08 million. At that pace, there are enough new homes on the market to satisfy demand for more than six months, the largest backlog in more than a decade."

"In February, the median price of a new home fell 2.9 percent from a year earlier, to $230,400, the fourth straight monthly decline, the Commerce Department said March 24."

'``Home prices won't go up forever,'' Robert Shiller, the author of ``Irrational Exuberance,'' a book about the stock market bubble of the late 1990s, said in an April 19 interview from his office in New Haven, Connecticut. ``Booms need a story to justify the prices.'' '

", a California based real estate investment advisory firm and nationwide publisher of foreclosure property listings, reported today that foreclosure activity in the first quarter of 2006 increased significantly from the fourth quarter of 2005 in several western and southwestern housing markets."

'"The biggest increases were in major urban centers around the West," said president Alexis McGee."

"She went on to say that such increases were coincident with cooling markets in previously overheated areas, and with the steady rise in interest rates."

'"Our goal has always been to help our investor clients locate distressed homeowners, and teach investors to develop win-win strategies that will benefit both the troubled homeowner and the investor," Ms. McGee stated."

"She pointed to widespread concern over the number of interest only and high negative amortization loans that had been issued by lenders in recent years as homebuyers sought to qualify for ever more expensive homes during the coastal markets' price boom of the last half decade."

'"In San Diego for example," said Ms. McGee, "more than half of home purchases in 2004 and 2005 were financed with these exotic mortgage products. When these loans reset to true market rates the payment shock can be severe and put many households in financial distress."'

In Sonoma County for example- in 2005 69% of purchases were financed with exotic mortgage products, and in 2004 more than half of home purchases were bought with risky loan products.

According to word of mouth, a local mortgage broker claimed that more than 80% of his loans are of the Neg-AM 'take it in the butt' kind of mortgage.

What does that tell you Sonoma County? Is it different here? Is it really?

"She referred to a recent study by Dr. Christopher Cagan of First American Real Estate Solutions. Cagan stated that an option ARM with payments of $800 per month could jump to $3000 per month when reset to market rates. "That's a recipe for financial disaster," said Ms. McGee."

"She added that rampant speculation in some markets, along with a slowdown in price appreciation would lead to an increase in delinquencies and foreclosures."

More Foreclosure news from Ben's place and Inman: "Foreclosures jumped 72 percent in first-quarter 2006 compared to first-quarter 2005, according to RealtyTrac. The first-quarter 2006 foreclosure report revealed that 323,102 properties nationwide entered some stage of foreclosure, up 38 percent from fourth-quarter 2005."

"The nation's quarterly foreclosure rate of one new foreclosure for every 358 U.S. households was higher than in any quarter of last year, the company also reported."

"'The sharp increase in foreclosures, continues a steady upward trend that we've observed since the beginning of last year,' said James J. Saccacio, RealtyTrac CEO, in a statement."

"'With the current market conditions, it's unlikely that foreclosures will return to the historically low levels they were at in recent years when interest rates hit rock bottom and home price appreciation skyrocketed in many areas of the country,' he stated.

"'Foreclosures have now increased in four consecutive quarters and are on track to go above 1.2 million in 2006, which would push the nation's annual foreclosure rate to more than 1 percent of U.S. households.'"


At 4/25/2006 09:31:00 AM , Anonymous tom stone said...

one reason the indicators are confusing is that the numbers are cooked....i doubt we will hear much about "soft landings" after the summer here in sonoma.when you look at the "exotic" loans and realize that even those that do not contain an element of fraud are extremely risky,you can get some idea of what foreclosures will be in the next few guess is that at least 75% of these loans will go into foreclosure unless lenders are able to restructure them as fixed loans at low rates at more realistic other words turn that 600k option arm into a 400k fixed 30 year loan at 7% and write off the difference.

At 4/25/2006 12:08:00 PM , Blogger Athena said...

LOL... I feel like the Oracle of the Sonoma Housing Bubble.... I received a new question this morning posed by a reader.

"is property appreciation rising in city of sonoma"

I am not in the mood for a long answer... so the short one is not bloody likely, not in any measurable way at this time. Median prices may give a slight blip as they will reflect the few homes that have sold and probably at the higher price range since the people buying million dollar properties are not the kind who are hurting for money and likely not all that overextended- so don't let any negligible median price rise fool you. Look at the inventory that is growing... in the county alone over 1000 houses came on the market in about a month- and more recently 35 houses came on the market in just 4 days.

From the POS Alert post on this blog:

In the Past 30 days...

The home featured in the POS Alert value declined: -9.7%

Sonoma Valley home values declined: -2.4%

Sonoma County home values declined: -3.6%

Inventory keeps rising and buyers are scarce. What do you think about whether or not Sonoma home values are appreciating?

At 4/25/2006 12:10:00 PM , Blogger Athena said...

Tom - good points... how likely do you think it is that lenders will give such write offs given the record number of houses sold in the past few years? Those are a lot of transactions, how many have they budgeted to write off potential 100-200k losses?

At 4/26/2006 10:52:00 AM , Anonymous tom stone said...

athena,i frankly do not know,i worked in credit/collections for 14 years,including a year in the test center of a woud be the smart thing to do,however there may be regulatory barriers,and there are also big egos involved,which is more important than any other far as the loss involved,it would be a h@ll of a lot cheaper than the time consuming and $ consuming foreclosure process...trying to sell reos in a falling market when suddenly "everyone knows" real estate is risky sounds like trying to catch a falling chainsaw to me

At 4/26/2006 11:35:00 AM , Blogger Athena said...

I also think it will take a while before the disbelief wears off- I think when the defaults start to happen they will think they can stem the tide and that it is an anomaly... I think the wave will crash before they get a plan in place for how to move through it without going under. There will be flailing, and heads will roll and others will be blamed.


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