Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Sunday, April 23, 2006

Buyers, Buyers, Wherefore Art Thou?

My favorite news article of the weekend came out of the Real Estate section of the Sonoma Index Tribune. Each week a realtor writes a column and espouses on what's on the mind of buyers and sellers in the Sonoma real estate market.

This week's article focuses on buyers worried about down payments and closing costs, and the lack of cash for these things, and sellers who are counting on cash in the transaction.

"Many a potential buyer groans at the thought of collecting enough cash to make a down payment on a home. Many a sellers, sitting on highly appreciated property, still finds himself counting those equity dollars carefully as he prepares to purchase his next home."

"While the first idea that comes to mind for acquiring sufficient cash for a down payment is the old fashioned plan of simply saving it, that process has become increasingly challenging for the young professional couple or family."

Right, since less than 7% in Sonoma County can afford a median priced home, it seems to be more than just a challenge at this point.

"Today, if you are not already enjoying the tax relief from homeowner's deductions, even sizable incomes are seriously eroded by taxes. With the always increasing costs of living, many find themselves with no room in the budget for savings."

Read that again. Laugh. Out loud. The price of ownership in Sonoma County is more than double and in some cases more than triple the cost of renting.

So if it is already a stretch to save due to the high cost of living, exactly how is someone supposed to be enticed into "enjoying the tax relief of homeowner's deductions"?

Think about that for a second.

The potential FB (F'd Borrower) will be paying MORE than they are currently paying for rent EVERY month.

The wages have not risen in Sonoma County, in fact high paying jobs have been lost. Those jobs were replaced by service industry jobs paying on average of $13 per hour.

If one were inclined to jump onto the FB party train they would be spending significantly more every single month, but not to worry, they will enjoy a bit of tax relief once a year. Spending is the new saving. Debt is really wealth.

Who benefits from such counter-intuitive advice? Oh, right... the real estate agent who sold the FB the property and the lender that gave them a suicide loan, with a smile no less.

"All is not bleak. These days, lenders, who seem to be holding substantial amounts of cash, have become more and more creative in styling loans that require very little cash from the buyer/borrower."

Right- there is the Liar's Loan, the I/O ARM (aka suicide loan), oh and don't forget the ever popular Neg-AM (negative amortization) Loan- and as Linda in La-La land calls it.... "The take it in the butt" loan. Aren't lenders wonderfully creative? Lenders are your friends. Money grows on trees. Tinkerbell makes it so.

"For those who qualify, the VA loans still afford the opportunity for a purchase with very little out of pocket expense on the part of the buyer."

Ah... this is really a realtor's call for buyers: "come out, come out, wherever you are? Vets? Have you all bought houses yet? Anyone... Anyone.... Buehler... we've got a loan for you....olley olley oxenfree!!!!"

"The seller will have some mandated expenses in such a loan, but those can be anticipated in many cases by offering the seller full price. Then the required costs to the seller become part of the total transaction"

Well it just wouldn't read like a true realtor column if there wasn't a reason for why a buyer needs to offer the full price thrown in.

"In addition to VA loans, there are loans for 90%, 95%, 100% for those with good credit history and very few of the elusive dollars. These loans require time, an appraisal at the full purchase price and squeaky-clean credit."

See comment about lender creativity above. Don't forget, it is essential to work with an appraiser that will hit the right number, because the buyer needs to offer the full price so everyone gets their commission. Be sure to use the appraiser the real estate agent and or lender recommend, because this is the person who is playing the game with them and won't throw a turd in the punch bowl with any critical thinking or candid honesty.

"There are also sellers who are willing to participate as lenders by carrying a portion of the value of the property in the form of a note and deed of trust secured by the property. These kinds of sales are particularly interesting to those with a good deal of equity in their property and a possible tax gain if they receive the whole amount."

Translation: "Hint, Hint... sellers sitting on properties with tons of equity, the buyer pool is drying up because they can't afford the prices, and they may not qualify for other creative financing... pony up so the real estate agents can sell some houses. They have mortgages, car payments and HELOCs to pay off too!"

"In addition to the high loan to value packages created by lenders, this is the time to turn to investors, family members, friends who may be interested in participating in a real estate investment with a known borrower."

Translation: "If you can't qualify for any of the no doc/fog a mirror financing offered by creative lenders please please please ask your friends and family to give you some money- so we can make some sales!"

"For those who have cash available to invest these days, finding the right spots for that money can be almost as daunting as not having it at all. The recent stock market continues to be uncertain. Money market and savings accounts have crept up slightly with higher interest rates. Most thoughtful investors are seeking diversity. They want their dollars spread over more than one type of investment. Real estate in California has historically been a dependable alternative. This is particularly true if the investor knows either the property or the borrower personally."

Right, ignore the current market, the unreasonable appreciation and the irrational exuberance that fueled 5 years of phony speculative price increases. The knife is falling... and everyone must try to catch it! Hurry!

" assured that there are lots of folks out there who would welcome a 5%, 6%, 7% return on their money. In many cases they may even be willing to accept "interest only" payments for a perdiod of time, while, you, the buyer become accustomed to your new costs of ownership."

Translation: "It will come as a huge shock how much more expensive it is to own a home rather than rent, so we want to give you time to fully bend over. We have way too many houses sitting on the market and the price reduced list just keeps growing. We will give you time to fully drop your pants, but you must hurry. The spokesperson for California's Association of Realtors said the only thing that will assure price declines is too much inventory. We have too much inventory. Buy something from these sellers we have coached into financing you before we have to drop our pants!"

"How does a buyer find such investors? Ask. Advertise. Let it be known that you really want to purchase your own home and that you are an excellent risk. Talk to recommended mortgage brokers. Then seek counsel on a creative way to structure the ownershisp process so that eveyone comes out well."

Translation: "Buyers, raise your hands so we know who you are. We have too much inventory and prices are going to drop if we don't find some fat fools willing to pay these ridiculous prices!!!"

"Or think about a co-signer. Lenders are often more willing to make a loan if they have more than one party signing all those dotted lines."

Sure, keep it all in the family. The more FB's the better.

"The end result is aloan that may not have been possible without the two party signatures."

Translation: "Even if you can't afford to buy due to your measly salary- drag a friend or family member into being an FB with you. Misery loves company, and the real estate agents and lenders will be forever grateful for your continued financial folly."

"Another cash source is one that we all tend to overlook. Many people have an extra vehicle, an RV, a boat- or even a garage full of a variety of unused equipment. The sale of some or all of these items can create available dollars and in some cases debt relief from monthly payments, making the individual more qualified for the loan he is seeking."

bahahahaha!!!! Stop buying stuff you can afford and sell it all to buy something you can't afford!

"In times like these, it is easy to become focused on our lack of dollars."

This is correct, and as it should be. People... Stop Buying Stuff You Can't Afford! If you don't have the money, don't buy it!

"When looking for a way to increase the cash in your life, look to the places and the people who are working with moving money around."

I will give you this... indeed real estate agents, mortgage brokers, lenders and all of their kind have done a bang up job of moving money around, like a great big ponzi scheme, pyramid scheme, shell game, MLM scheme... fecal matter by any other name would still stink, and don't even think about trying to polish it.

"Get a clear picture of what it is that you want, talk to the experts and you will discover that it is really possible. There is no time like the present for putting yourself in the California real-estate picture."

Just nod and smile and look away. Move along now. Nothing to see here people. Eyes front, eyes front.


At 4/23/2006 08:44:00 PM , Blogger moonvalley said... the commentary! Too too true.Youknow what we need on KSVY an anti-Re about that?

At 4/23/2006 09:11:00 PM , Blogger Athena said...

I'm game! The Moonvalley and Athena show! But who will subsidize our show with their advertising dollars? ;-D

At 4/23/2006 09:38:00 PM , Blogger Bubble-X said...

"Spending is the new saving. Debt is really wealth."

As always your perspective is razor sharp.

And, by the way, Bill Fleckenstein is great.

At 4/23/2006 09:49:00 PM , Blogger marin_explorer said...

"Buddy, can you spare a dime for your neighborhood realtor?"

Desperation, anyone?

At 4/23/2006 10:15:00 PM , Blogger Athena said...

Is it wrong that I get a visual of the new milk money bully driving up in a Lexus?

At 4/24/2006 09:59:00 AM , Anonymous tom stone said...

sellers should carry back a second at 6 or 7%??? baby get ready to discount that note by 50% or more if you want to sell it today and more next week,this advice on raising $ would be appropriate if you were trying to pay for cancer treatments for a close relative...i hope this realtor bought properties in merced and phoenix

At 4/24/2006 10:12:00 AM , Blogger Marinite said...

Why aren't they conerned about budgeting for that crushing tax bill at the end of the year?

At 4/24/2006 10:23:00 AM , Blogger Marinite said...

Another cash source is one that we all tend to overlook. Many people have an extra vehicle, an RV, a boat- or even a garage full of a variety of unused equipment. The sale of some or all of these items can create available dollars and in some cases debt relief from monthly payments, making the individual more qualified for the loan he is seeking.

It is shocking to me that realtors are actually advocating buyers selling personal items to raise cash to get a loan to "buy" a house. That really smells of desperation.

At 4/24/2006 11:42:00 AM , Blogger moonvalley said...

in some cases debt relief from monthly payments, making the individual more qualified for the loan he is seeking.
Anyone seriously thinking about debt -relief measures should definitely not be thinking about buying a house. I also have very hard time with Realtors always referring to something as a home, when the word house is more appropriate. Of course the word home is redolent with ll sorts of coded meanings, Thanksgivings, Holidays by the fireside, all sorts of family implications. A house is merely a structure. NO romance there.
If people would start calling it by it's true name perhaps it wouldn't be such a Debt-trap.

At 4/24/2006 11:43:00 AM , Blogger Athena said...

Don't you love it Marinite. The thing is, how many of those extra vehicles and garage's full of toys and boats actually belong to the renters? How much you wanna bet the majority of those things were bought with HELOC money as of late? Seems to me those things are going to get sold to make the montly note rather than buying a house. It does smell of desperation, sounds like begging for buyers. hey... a new game show!

Tom- this particular realtor is representing two flipper properties in Boyes Hot Springs. Two TOTAL chit holes, one of them featured on the price reduced list as they are asking a couple hundred thousand above zillow, and above the purchase price from last year. these are little one room cabins and I heard a rumor that one of the units isn't even legal. I wonder if this realtor is actually representing the flipper or IS the flipper?

At 4/24/2006 11:48:00 AM , Blogger Athena said...

Oh and do you love how the realtor switches back and forth between laying on the emotion of "home" and investment?

Ask your friends or family members if they want to INVEST in you- a known entity borrower so you can buy a home...tell them you want to own your own home and ask them to invest.... WTF?

Am I the only one that laughed out loud at this? Why would an investor want to give you money for you to own your own home? A person wanting to call a place home, wants to move in, stay a while and sink in some roots. An investor wants to make money. The only way an investor makes money is if the asset gets sold. So it is a stupid contradiction to be advising a wannabe FB to solicit investors for their "home." For the love of Pete, some people are just dumb.

At 4/24/2006 12:33:00 PM , Blogger sf jack said...

"Get a clear picture of what it is that you want, talk to the experts and you will discover that it is really possible. There is no time like the present for putting yourself in the California real-estate picture."


The above sounds like a desperate plea for first time buyers to materialize out of thin air.

I'm just thinking about that 7% who can afford the median home in Sonoma County with traditional financing.

Any first time buyers among that group?

The author must be mistaken, and thinking that Google is moving its headquarters to Petaluma.

At 4/24/2006 12:52:00 PM , Blogger Athena said...

LOL... SFJack, I am thinking that those few people in the 7% who can afford to buy houses have either already bought houses they can afford, or KNOW they can afford to buy but KNOW better that there is no reason to pay these ridiculous process divorced from all fundamentals.

If you make good money and live in Sonoma County, you likely appreciate just how hard it is to make that kind of money, and how few people do in this area.

Even if Google and Yahoo and the likes relocated to Sonoma County, they wouldn't find a workforce qualified to work for them. It would do Sonoma County little good, all G's and Y's employees would simply enjoy a reverse commute from their bay area digs.

At 4/24/2006 12:53:00 PM , Blogger Athena said...

I just want to answer a question I saw raised in a different communication... the question was: "Are people moving to Sonoma?"

Immigrants are moving to Sonoma. They can afford the rents because of the practice of multiple people in a dwelling. Look at the jobs data, and the population data provided by SRJC and Sonoma county reports on the side of this blog.

People can't afford to buy in Sonoma, the housing there is not substantially less than anywhere else in the bay area and the schools are far worse off, and commuting from there to major bay area cities is not a treat in the slightest, and the prospect of high paying jobs is laughable.

so no. smart people are not moving to Sonoma.

At 4/24/2006 01:02:00 PM , Blogger Athena said...

LOL... I feel the need to answer another question I received not posted on the main blog-

"Is Sonoma a good investment?"

;-D Honey, you better grab your magic 8 ball and give it a shake.

Why would you want to buy at the top of the bubble? Why would you do something like that? Do you know anything about the economy in Sonoma County? Look up county demographics, look up the jobs report and look up the average household income in this area.

Now take a look at the inflated prices that was the bubble and notice that there is not a single fundamental attached to those phony increases. Do you know what spurred them? Speculation and dumb people, emotional appeals to FB's to jump in before they are priced out of the market.

Don't want to believe that- search this blog and find out how many people in the last 4 years took out risky I/O, ARM and Neg-AM -NAAVLP (Negative Amortizing Anal Voodoo Loan Product)loans- because THEY COULD NOT AFFORD TO BUY ANY OTHER WAY!

Now ask your question again- Is Sonoma a good investment?

Is it ever a good idea to be the last fool holding the bag and paying the highest price for goods not worth half the price you paid? Its good to the guy running the ponzi scheme if you run in and grab that bag. But if you ask me, a person has got to be kinda dumb in the face of so many facts displaying the financial folly going on here.

Stick it out and wait a couple years, and when the ARMS have reset for the fools who overpaid to get into the Sonoma market who work service industry and store clerk wannabe real estate agent jobs... and THEN you might find a good investment.

At 4/24/2006 02:03:00 PM , Blogger Athena said...

ok.. I am feeling like the magic 8 ball now. Here is the new question posed:

"(what is the) most common problem when my negative-amortization loan resets"

1. Your payment will increase. Likely significantly, check the specifics in your interest rate details to see how much of an increase. Can you afford to pay double what you are paying now?

2. You could also owe more than your property is actually worth and therefore you will have trouble trying to refinance into a lower rate. You will likely not get favorable terms that will benefit you much as few lenders want to finance more than the value of the house.

3. Bending over can be painful. Be sure to stretch first.

Tom... do you want to add anything to this reader who asked this question?


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