Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Thursday, April 13, 2006

Demand for Housing Slacking Off

"The U.S. economy is beginning to slow as a result of weakening demand for housing, rising energy costs and flat consumer spending, the chief economist for Kentucky's largest bank said yesterday."

"Potential problems are developing nationally. The demand for housing is slacking off, but construction is "trending upward," he said. Nationally, inventories of available housing are "at record levels by a large margin."'

"The biggest uncertainty facing forecasters is energy prices, particularly for gasoline, DeKaser said. Gasoline will remain high this summer, but the long-term trend is uncertain because of international situations that are impossible to predict."

'"Energy has been a drag on the economy, especially on consumer spending," he said. Current prices are not a problem; much higher prices resulting from some disaster in the Middle East could be."

"DeKaser and National City economist Ryan Reed presented a Web cast program."

"They predicted:

• The U.S. economy, which grew by 3.5 percent in 2005, will grow by 3.6 percent in 2006, but only 3 percent in 2007.

• Consumer spending, which has driven the U.S. economy in recent years, will increase by 3.5 percent in 2006 -- the same as in 2005 -- and by only 3.2 percent in 2007.

• National home sales, which increased by 7.1 percent last year, will decline 2.1 percent this year and fall 8.7 percent in 2007."

Rent it out or Bail out?

"Got caught up in the real-estate fever? Let's start with the painfully obvious: If you have no choice but to sell, then you ought to sell -- and you should probably sell quickly."

"Speculators are finding they can't flip their investment properties for a quick gain. That leaves them with a tough decision: Should they hang on and rent or should they bail out, possibly at a loss?"

"To find out if you're in the "no choice" camp, simply run the numbers. Take the rental income on your investment property and subtract your costs, including the mortgage, property taxes, insurance and maintenance. If the house or condominium is a sizable cash drain and there's no way you can keep covering the shortfall, you've clearly got a problem."

'"I'm not selling anything," says John Schaub, author of "Building Wealth One House at a Time" and a real-estate investor in Sarasota, Fla. "But you have to be able to afford to hold your properties. Most of these people ought to sell, because they don't have the aptitude to be a landlord and they don't have the cash flow."'

"And don't kid yourself: If you have a cash-flow problem now, it could get a lot worse. You could be hit with rising borrowing costs, as the rate adjusts upward on your mortgage or as principal becomes due on your interest-only loan. "A lot of the people who bought investment properties are using these exotic loans," says Karl Case, an economics professor at Wellesley College in Massachusetts. "You could have the double whammy of falling prices and rising carrying costs."'

"Chris Mayer, a real-estate professor at Columbia University's business school, notes that home sales are slowing. That usually foretells a period of stagnant or falling house prices."

"Over the past 30 years, home prices have outpaced inflation by two percentage points a year. But over the past five years, that inflation-beating margin has jumped to seven percentage points a year. The implication: Recent returns are unsustainable."

"Even if real-estate prices simply stagnate, many property speculators will be reluctant to sell their homes and condominiums, because they will be under water once they figure in the 5% or 6% selling commission."

"Indeed, this reluctance to sell at a loss helps explain why a slowdown in home sales typically precedes a price decline. Homeowners have a target selling price -- it might be the price they paid, or the price they could have got at the market peak -- and they initially refuse to accept anything less."

"But waiting to "get even, then get out" could be a huge mistake."

'"When prices start to fall, they usually continue to fall for a while," Prof. Mayer warns. "You want to be aggressive in setting a price that allows the property to sell, rather than slowly lowering your asking price and following the market down."'

Mortgage indicator stats skipped a beat again...

Analysts differ on whether there is a housing bubble, but most agree that the market is cooling off from its record run.
The MBA's seasonally adjusted purchase mortgage index fell 4.7 percent to 417.7 from the previous week's 438.2.

The index -- considered a timely gauge of U.S. home sales -- was also below its year-ago level of 474.5.

The group's seasonally adjusted index of refinancing applications decreased 6.6 percent to 1,532.4 compared to 1,640.8 the previous week. A year earlier the index stood at 1,899.6.

The refinance share of mortgage activity decreased to 36.0 percent of total applications from 36.6 percent the previous week. It was the lowest refinance share since the week ended July 30, 2004 when it reached 35.8 percent.

But if you happen to want to try your hand at catching a falling knife, Mark Nash has some advice for you....
"Finding your dream home is exciting, but in the real estate market, it pays to shelve your emotions and look at the facts."

"Although the feverish pace of home buying has eased, it's not yet a buyer's market."

"To find the best value, you need to know the fair price. Otherwise, "if you go in unarmed, you're going to overpay," said Mark Nash, author of "1,001 Tips for Buying and Selling a Home."'

"RESEARCH HOME VALUES: Despite national trends, home prices depend on the neighborhood and sometimes vary street to street. Web sites such as allow you to investigate what individual homes are worth. Compare those values with the sale price of homes recently sold, otherwise known as sold comparables."

"TIME YOUR SEARCH: Be aware that spring is the busiest season for home sales. If sellers won't come down to a price you're comfortable with, and you can wait, you may get a better value in the fall when there are fewer buyers, and the housing bubble could potentially deflate more."

"START NEGOTIATING: If the owners won't meet your offer, and you want the house, ask if they'll instead cover some of the closing costs, a practice that's becoming more common again. And hire an independent inspector to evaluate the home's condition. If you haven't already slashed the price, the owners may agree to replace, say, an aging furnace."


At 4/13/2006 09:48:00 AM , Anonymous Anonymous said...

personally i would rather take the capital gains hit and rent for a year in this market...even if you just sold,why buy now? the market has started to correct and it's going to be a lot more than the 15% long term capital gains tax would be..if you have too much money send it to me,i promise to spend it on women and whiskey..not a dime wasted.

At 4/13/2006 06:03:00 PM , Blogger marin_explorer said...

The demand for housing is slacking off, but construction is "trending upward"

I've read that too. Apparently, developers are holding more land, and they recognize the need to build and sell before something happens?

Does anyone else imagine new home supply outpacing demand in a couple of years, if not sooner? It could get very interesting...even locally for areas that experienced a boom in development.

At 4/13/2006 11:17:00 PM , Blogger Athena said...

I think our new home supply is going to outpace demand for the next couple of years at least. However, I think that they will have an easier time selling to those few remaining buyers who have talked themselves into this market... I think the new homes will sell better than the existing homes in the same price range. However, I think come 2007 there will be problems for everyone and I think Sonoma County will have several new developments all competing with each other and existing homes... plus I think we will see a big rise in FB's trying to bail out from under the weight of their debt then too...

At 4/14/2006 12:20:00 PM , Blogger randolfe said...

My only disagreement with the negotiating tactics is the notion that receiving concessions in things like closing costs (I've also read of sellers paying x-years of home insurance, buying vacations, giving cash back, etc.), is that it doesn't help the buyer with the assessed value. Assuming the home appraises, doesn't it still go on the books at sale price, despite all these manipulations? Aside from paying unnecessary property taxes, you will pay for these comps later when you become the seller of the property; not 1:1, but not 0:1 either.

I more like the idea of negotiating a hard-sale price (and not buying until you get a fair price, period), then extracting whatever comps you can get on top of that as sweeteners if it is a buyer's market and/or a motivated seller.

At 4/14/2006 12:28:00 PM , Blogger Athena said...

I agree Randy. I think in a normal market it may be a bonus to get closing concessions... but in a market that is still propped up with sellers who swallowed the delusions that their properties are WORTH the phony inflated makes no sense.

There is no reason and no honor in giving them the illusion that their price is fair or reflective of the real market.

the prices in the past 4 years were reflective of low interest rates, lending standards that at best required the ability to fog a mirror, an irrationally exuberant real estate industry, and speculation by fools who drank the "real estate never goes down" kool-aid.

Those are NOT fundamentals and none of those things really made property more valuable. Wages did not rise, and in fact the high paying jobs in our county were lost... we increased only low wage jobs for the service sector... affordability fell yet prices rose... prices rose because of the willingness of the real estate and lending industry to straddle the fence of white collar fraud to give the illusion of demand.

no... I think a buyer should not be negotiating concession items unless they have first negotiated a price more reflective of the real value of the property.

At 4/28/2006 12:01:00 PM , Blogger said... integrates how much homes SOLD for nationwide using the google mapping technology. Simply select city and state from the city menu and click search. If you don't see data for your area simply email with your zipcode and or address and they'll update the site with your info and email you within a few days.


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