Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Thursday, April 27, 2006

Junk Food Housing News

You know, headlines lately are leaving much to be desired, reminds me of the empty calories of junk food.

Recently, (published April 22, 2006) The Press Democrat published an article about the Sonoma County Condo market. Their headline read: "Condos weather the storm"

The story said:

"Normally, condominium prices are the last to rise during a market surge and the first to fall when sales drop."

"But Sonoma County's condominium market has remained stronger than many had anticipated in the face of slowing home sales and flattening prices. Some still warn the condominium market could soften this year with the addition of new units and apartments converted to condos. But the supply of condominiums continues to grow as developers anticipate more buyers will look to condos as an alternative to high-priced houses."

'"Affordability always is the key for why we're still selling them," said Alice Curtis, Santa Rosa manager for Creative Property Services."

"Increasingly, condominiums have been the most affordable housing to purchase in a county where the typical house doubled in price over five years. Long the choice of singles and couples seeking low-maintenance homes, condominiums have become the starter home for families and other first-time buyers. Condominium prices took off in the wake of house prices as demand drove down the supply of units for sale. The county's condos are concentrated in the largest cities and account for about 15 percent of total home sales."

"Curtis cautioned the market has softened and that condominiums are just as likely as houses to sell for less than they would have last summer, when prices peaked. She noted the average home sold for up to 5 percent above the asking price in recent years, but is now selling for about 3 percent below."

"That says the market is still softening because clients are still lowering their asking prices and we're still seeing them selling for lower than those asking prices," Curtis said. Loan interest rates have steadily increased over the past year and combined with high prices are pushing more buyers out of the market."

Reality of Condo Sales in Sonoma County (March)

County: 73 units sold YoY down -34.80%

Rohnert Park: 17 units sold YoY down -37%

Santa Rosa: 34 units sold YoY down -45.2%

Sonoma: 8 units sold which can hardly account for the headline of Condos weathering the storm. (up from February which had 0 sales) up 33.3%
Sonoma's median price is down -24% and average price down -20.70%

speaking of that "storm" the Sonoma Index Tribune had a bit of a blurb about local real estate:

"PRIME REAL ESTATE at Armstrong Estates on Sonoma's east side may not find a buyer quite as quickly as in past years, when homes would be snapped up within a week of hitting the market."

"Home sales have slowed down over the winter months, but as the weather heats up, so does the housing market, even if agents predict 2006 will be more mellow than past years. Neither buyers nor real estate agents were tempted to slog through the mud over a particularly wet March, but a glint of sunshine has people pounding the pavement."

(There is nobody pounding the pavement in the picture they posted. The MLS is growing daily, as is the price reduced list. When they said "as the weather heats up, so does the housing market" - do they mean the number of houses put up for sale is heating up? Because that is true. The buying isn't heating up though.)

You won't be able to read the rest of it even if you click on the links unless you want to pay for it. They really are arrogant enough to believe that users must pay to read the news on the website. This is Sonoma. Everyone wants to live here, and everyone wants to read our news and will pay for it because it is that good.


At 4/27/2006 03:12:00 PM , Blogger Marinite said...

I really don't think prices will come down much until the toxic loans that people are now forced to use go away and/or rates go a lot higher. But the longer this thing is allowed to keep going the harder it will fall in the end and the more pain that will result.

At 4/27/2006 04:19:00 PM , Blogger marin_explorer said...

But the longer this thing is allowed to keep going the harder it will fall in the end and the more pain that will result.

Agreed. I'm actually a bit alarmed that many people I know are still upbeat, and planning buy second homes--despite the rise of cautionary news articles. Then again, isn't that a documented stage of the bubble cycle? "if we're confident enough, a collapse won't happen". Dot-bomb deja vu.

At 4/27/2006 05:54:00 PM , Blogger Athena said...

I haven't heard much bullishness in quite a while. But I still hear that while there are fewer buyers because prices are so high- people around Sonoma believe that it won't affect the prices here. There will always be people who want to live in Sonoma and the kind of people who want to move here have money. The belief seems to be that those who are reducing their prices were either ridiculously overpriced- after all everyone in Sonoma believes their house is worth above $650k... or they are foolish people who have over-extended themselves and then reduced their price and ruined values for others because of their poor money management. Nobody thinks that the buying slowing to a trickle and price reductions is indicative of a problem of the economic fundamentals not supporting the irrational exuberance here.

Just for the sake of review... here are the stages of a bubble again.

I think we are at stage 4. The only people I hear talk about buying- are the greatest fools. They are hearing things like the market is stabilizing... the market is returning to a more balanced state, and they think the big risks are over, and it is now a safe time to enter the market. These are the people who hated to miss a boom, but felt risk averse when they saw prices were rising so fast. Something in their gut told them to hold back then- because prices don't just rise like that without losing a connection to fundamentals. Now these greatest fools are thinking that the risk of a crash is over and it is now safe for them to enter the market. If they are so risk averse you would think they would take an economics course, or study a little about historical bubbles and recognize who they are... and what stage we are in.

Stage 1: A financial shock wave
"A crisis begins when a financial disturbance alters the current economic status quo. It could be a war, low interest rates, or new technology, as was the case in the dot-com boom."

Stage 2: Acceleration
"Not all financial shocks turn into booms. What's required is fuel to get the fire going. After 9/11, I believe the fuel in the real estate market was a panic as the stock market crashed and interest rates fell. Billions of dollars flooded into the system from banks and the stock market, and the biggest real estate boom in history took place."

Stage 3: Euphoria
"We have all missed booms. A wise investor knows to wait for the next boom, rather than jump in if they've missed the current one. But when acceleration turns to euphoria, the greater fools rush in."

"By 2003, every fool was getting into real estate. The checkout girl at my local supermarket handed me her newly printed real estate agent business card." good lord... was he shopping in Sonoma, Home of the Clerk turned Wannabe Real Estate Tycoon?

"The housing market became the hot topic for discussion at parties. "Flipping" became the buzzword at PTA meetings. (ah yes, the land of the housewife turned real estate maven.) Homes became ATM machines as credit-card debtors took long-term loans to pay off short-term debt."

"Mortgage companies advertised repeatedly, wooing people to borrow more money. Financial planners, tired of explaining to their clients why their retirement plans had lost money, jumped ship to become mortgage brokers. During this euphoric period, amateurs believed they were real estate geniuses. They would tell anyone who would listen about how much money they had made and how smart they were." (my favorite, mechanics, bartenders and firemen the new junior Warren Buffets)

Stage 4: Financial distress
"Insiders sell to outsiders. The greater fools are now streaming into the trap.
The last fools are the ones who stood on the sidelines for years, watching the prices go up, terrified of jumping in. Finally, the euphoria and stories of friends and neighbors making a killing in the market gets to them. The latecomers, skeptics, amateurs, and the timid are finally overcome by greed and rush into the trap, cash in hand."

"It's not long before reality and distress sets in. The greater fools realize that they're in trouble. Terror sets in, and they begin to sell. They begin to hate the asset they once loved, regardless of whether it's a stock, bond, mutual fund, real estate, or precious metals."

Stage 5: The market reverses, and the boom turns into a bust
"The amateurs begin to realize that prices don't always go up. They may notice that the professionals have sold and are no longer buying. Buyers turn into sellers, and prices begin to drop, causing banks to tighten up."

"Minsky refers to this period as "discredit." My rich dad said, "This is when God reminds you that you're not as smart as you thought you were." The easy money is gone, and losses start to accelerate. In real estate, the greater fool realizes he owes more on his property than it's worth. He's upside down financially."

Stage 6: The panic begins
"Amateurs now hate their asset.
They start to dump it as prices fall and banks stop lending. The panic accelerates. The boom is now officially a bust. At this time, controls might be installed to slow the fall, as is often the case with the stock market. If the tumble continues, people begin looking for a lender of last resort to save us all. Often, this is the central bank.
The good news is that at this stage, the professional investors wake up from their slumber and get excited again. They're like a hibernating bear waking after a long sleep and finding a row of garbage cans, filled with expensive food and champagne from the party the night before, positioned right outside their den."

Stage 7: The White Knight rides in
"Occasionally, the bust really explodes, and the government must step in -- as it did in the 1990s after the last real estate bust when it set up an agency known as the Resolution Trust Corporation, often referred to as the RTC. As it often seems, when the government does anything, incompetence is at its peak. The RTC began selling billions of dollars of unbelievable real estate for pennies on the dollar. These government bureaucrats had no idea what real estate is worth."

At 4/28/2006 09:59:00 AM , Anonymous tom stone said...

athena i believe we have entered stage 5,exotic loans are a whole lot less popular,and hard to get than they were 2 months ago,and subprime loans are now into low double digit figures...these subprime or alt-a stated loans were a big part of the less than $600k market for the last 2 or three years.these loans don't have to go away for the bubble to pop,all i t takes is a change in attitude,and i am seeing that change in attitude more each day.also even with the historically low rates wwe still have the exodus of speculators and the high number of people who bought more home than they could afford,and who will be forced out over the next 2-3 it is all over but the screaming and no one is going to change that fact.

At 4/28/2006 10:45:00 AM , Blogger Marinite said...

Actually, I think some markets are in stage 4 (e.g., Marin/Sonoma) and others are in the early phases of stage 5 (FLA, SD).

At 4/28/2006 11:46:00 AM , Blogger Athena said...

yes... I guess I can agree with both of you... I see the tail end of us still in stage four... like a line of congested traffic.... some headed into 5 and some stuck way back in the jam not realizing they are entering new territory and there will be bodies up ahead.

At 9/20/2007 06:58:00 PM , Anonymous Anonymous said...

This comment has been removed by a blog administrator.

At 9/20/2007 07:01:00 PM , Blogger Athena said...

Quit posting your Costa Rica Spam on my blog!

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