Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Saturday, April 08, 2006

On the Highway to Housing Hell

I just love a good commentary from Richard Benson

"For the past decade, homeowners in the United States have been living in “Housing Heaven”. In this heavenly place, profits are always made; prices only go up; interest rates only go down; developers keep building, marketing, and selling megabuck, luxurious spa-like residences, that are all sold pre-construction; property speculators always make money, and pyramid their purchases into owning many properties to flip for a quick profit; and, second-homes are not an expensive luxury, but a wise investment for retirement."

"If you really needed to make ends meet while living in this so-called Housing Heaven, all you had to do was buy a vacation home, rental property, or second-home and proceed to “install your own ATM on the side of your financed house” with your bank’s help, of course."

"Who needs to work, when you can simply go to the bank and rob your own house? It’s easier than robbing the bank! Living this way is fine in Housing Heaven, but not down here on earth. Here’s why."

"Consumer debt is up to $2 trillion (not including $440 billion of revolving home equity loans and $600 billion of second mortgages)."

"Not only do consumers owe a whopping $9 trillion in mortgage debt, but home equity extraction has reached $600 billion annually."

"Homeowners have basically received, and spent, in excess of $2 trillion that they never earned. (Just take a look at the increase in total mortgage debt in the Federal Reserve’s Flow of Funds Data since 2000)."

Below are some of the reasons why many property owners are about to descend into: “Housing Hell”

- "When housing prices are flat or falling, there is no Angel, Tooth Fairy, Easter Bunny or Santa Claus you can call, to refill the ATM machine when it runs out of cash;"

- "Home equity can suddenly shift from a market reality to a purely existential concept. The homeowner is now engaged in an “Existential Equity Extraction” or “EEE”.'

"An example of this in today’s world is when a home, with equity taken out, is routinely appraised for a mortgage refinancing at 5 to 10 percent higher than it would be appraised for an actual sale;"

- "Home prices are under horrible pressure. There are probably a few million property owners, including speculators, flippers, and second-home buyers, who are in way over their heads."

"We’ve all heard stories about second-home buyers who really couldn’t afford the luxury and high expense of a second-home priced at $200,000, yet they purchased one for $250,000 and rationalized its affordability because “the value would only go up to $300,000 or more”.'

"Besides, they naively believed “it could always be sold quickly in a bidding war for a profit”. In resort areas – given the number of days people actually use their second home – staying at the Ritz for $500 a night could be a much better deal. Do the math; it’s not pretty."

- "Demand for over-priced housing is slowing and new buyers are taking their time, being picky, and even renting. Homeownership, as a percentage of the population, is already at a record-high."

"This level was achieved by using every trick in the mortgage lending book, regardless of income or down payment. Virtually every borrower was approved for a loan of some kind."

"Fifty percent of mortgages written over the last two years have been adjustable-rate mortgages (ARMs) and many buyers qualified for a mortgage because of the low teaser rates. In addition, sub-prime mortgage lending has reached $700 billion, or 12 percent of total mortgages."

"As interest rates adjust up, housing prices are forced down."

"Given these statistics, it should be no surprise that the affordability index for the first time buyer is at a 20-year low."

- "Speculative buyers have stopped buying and many potential buyers are canceling orders and leaving deposits on the table."

- "In many states, property insurance is up 25 to 30 percent, right up there with soaring heating and air-conditioning costs."

- "The record rise in home prices has helped balance state budgets, but at the expense of property owners who are not capped on their real estate taxes."

"The Alternative Minimum Tax is also emptying homeowner’s checking accounts!¦ $2 trillion of ARMs were written in 2004 and ’05 and are scheduled to reset in 2006 and ’07 to much higher market interest rates, making them much less affordable."

- "On the supply side for housing, sheer panic is beginning. As home buyers cancel orders, developers are taking their deposits, slashing prices 10 to 20 percent, and offering incentives such as free furnishings, granite countertop upgrades, wall-mounted TV’s, closing costs, etc. In specific home developments and condominium complexes, price reductions of $40,000 to $100,000 are not unheard of."

- "Housing prices in active real estate markets have gone up so much that the costs associated with owning vs. renting make renting a far more attractive choice now."

"The degree to which owning is so much more expensive than renting is the true measure of the extent of the housing price bubble."

"So, welcome to Housing Hell."

"Now that buyers are willing to wait one or more years before buying, there are more sellers than buyers."

"Interest rates, in the meantime, continue going up."

"Let's also not forget the Existential Equity Extraction. With $700 billion of sub-prime mortgages written (of which 10 percent could default), $2 Trillion of ARMs set to reset, and mortgage delinquencies near 5 percent, equity to extract is vanishing."

"As the refinancing game ends and borrowing costs increase, a significant rise in foreclosures could put a few million more homes back on the already-saturated market!"

"When these foreclosures come, many of the homes for sale will have no equity and the seller will want a quick sale. Buyers will still be choosey, unless there is a real deal and the prices are marked down big time."

"The entire structure of housing prices will move lower with these forced sales. With mortgage foreclosures mounting up, it could get unbearably hot in Housing Hell."

"Our estimate is it will take about six months for sellers – particularly speculators who never intended to live in their properties but whose sole intention was to “flip” them for a profit – to realize they are toast."

"Over the past 30 years, the United States has seen a Housing Hell scenario a number of times. In 1980-82, property values declined significantly each year."

"In ‘90, prices fell painfully again for five straight years in a row. There was a slight recovery in ’95, but prices fell again in ’96."

"When you look back, you will realize that the housing markets that suffered the most (particularly the Northeast and California), took almost 10 years to recover from the downturn. You may also remember when homeowners lost money every month and were forced to rent out their properties at a loss because they couldn’t sell them. Perhaps you know one of these homeowners."

"Based on the logic of history, those who rent for a few years, rather than buy, will be rewarded the most. Yes, the day will come again when it will, indeed, cost less to buy than it does to rent. When that day comes, it will signify the return, once again, of Housing Heaven."


At 4/08/2006 07:14:00 PM , Anonymous tom stone said...

anyone who thinks 10% of subprime loans will default lives in a dreamworld...the distinction between prime and subprime is the credit score,and with homes financed 100% and 50% of the gross income allotted to house cost by lenders on stated income loans...on"prime" loans!!! with these lending standards every loan in a pool would have to be carefully analyzed to have any appreciation of the risk...people who put these pools together have fiduciary responsilities and those who buy them are supposed to do due diligence.may they (deleted) from their dogs.

At 4/08/2006 08:05:00 PM , Blogger Athena said...

so are we taking swags? my swag is that 30% of subprime loans will default... we ought to be able to come up with some pretty good numbers for the financial impact. What was it... 500 something homes were sold in Sonoma Valley in 2005 with 69% using IO/ARM loans... I bet 40% of those were subprime and I bet 30% of that number defaults.

At 4/08/2006 08:49:00 PM , Anonymous realtor fraud said...

Anyone notice how the Press Democrat is now displaying Sonoma counties real estate data on page 2 of the business section?
Previously, it was splashed all over page 1 of the real estate section.
I'm sure last months 11% reduction in median price had absolutely nothing to do with this decision.

At 4/08/2006 08:53:00 PM , Blogger Athena said...

Could also be that we are running at about 50% the volume of sales YoY from 2005 and apparently volume was already down for 2004/2005... flat apparently. So I think they are trying to do as much as possible to not draw attention to the naked king.

Plus, when was the last time they posted anything that wasn't simply regurgitation from the pillars of the industry in the county?

Those pillars are coming down I think... was just reading the Sonoma Index Tribune and for fun started counting the real estate agents... I lost count, and got bored somewhere around 89 and I was only a third of the way through the real estate section.

Stay tuned though... there are some new price reductions. Still not to the levels we should like to see... but they are happening and I saw one house that actually sold... and it sold for well under 50k of its last list price that was on the price reduced list already. Can't wait to do the calculation for how much of a haircut they had to take.

At 4/08/2006 11:16:00 PM , Blogger moonvalley said...

We were in the Girl and the Fig having lunch with a friend today. So, she says she is going to sell her house. Now any amount she gets is going to be gravy, she is extremely financially responsible. There is no way she is going to lose money on her house , however she was still parroting the same, "it's different here in Sonoma" to us. I tried to explain about all the reductions, the IO and Neg AMs and ARMS. The large amounts of property here in Sonoma purchsed that way and the fact that all this stuff is going to re-set. She said nothing, except warned us we ought to buy pretty soon. According to her, it's only going to go up 6% to 10% this year..good time to jump in. She didn't mention the crazy junk loans as she is someone who paid cash for her I said she's extremely sensible. So we're walking around after window shopping, and out of nowhere she says..."you know my masseuse just bought a house for 900k..isn't that strange?"

At 4/08/2006 11:21:00 PM , Blogger Athena said...

So we're walking around after window shopping, and out of nowhere she says..."you know my masseuse just bought a house for 900k..isn't that strange?"

BWAHAHAHAHAHA!!! That would have made me laugh so hard there would be pee involved if it had been me walking with her.

I have to say... I have taken to shaking my head, laughing out loud and writing down the webaddress for this site for friends. I tell them, that if they read and still have questions to give me a call.

It has worked on a couple of people now who have backed out of very foolish purchase decisions.

Of course I did not get the phone call telling me I was right of course. It must be that people can take one look at me and see I like being right way too much ;-D But twice in as many weeks people have big time backed out of big deals and I heard it through the grapevine, and they just happened to be people I nodded, smiled, looked away and gave them the website to read.

At 4/09/2006 12:14:00 AM , Blogger marin_explorer said...

"it's different here in Sonoma...good time to jump in"

I suppose that explains listings I saw around Sonoma square today: 3-4BR ranch/tract homes still going for $1M+. So people still believe this can keep going? I guess the spending party isn't over--yet.

At 4/09/2006 12:20:00 AM , Blogger Athena said...

I would say the ASKING party is not over yet. But the spending party is petering out according to the recently sold report.

It is going to take a long while before the asking gets more realistic. People simply aren't talking to the contrarians. They aren't looking for information, and there is no media outlet in the area willing to burst their bubble.

They talk among themselves, quote the same rhetoric- its different here, we get rich people from all over, there are a lot of commuters who make the big bucks, everyone wants to live here, prices won't go down here, but we just won't have double appreciation for a while, then it will go back up.

That is the party line. I hear it from teenagers all the way to great grandmothers. Kind of scary because they are all going to act shocked and I will be having to restrain myself from smacking them in the grocery store. :-D

so since they are all talking to each other... until some start to live the real estate horror story and others find out about it... the kool-aid will keep flowing.

At 4/09/2006 08:25:00 AM , Blogger Rob Dawg said...

More than 100% of the sub-prime loans will default in some form or another. By that I mean the investors holding these notes will not see as much money as the note says they are entitled to recieve. More than 100% but a tertiary market trading these notes is developing so the same note will disappiont more than 1 investor. 20% will flat out default, 20% will lose the house whereafter we cannot track the investor losses accurately, 20% will re-fi at a discount/better terms for the borrower, 20% will short sell.

At 4/09/2006 10:58:00 AM , Blogger Marinite said...

there are a lot of commuters who make the big bucks, everyone wants to live here, prices won't go down here, but we just won't have double appreciation for a while, then it will go back up.

Interesting how the rhetoric has softened some. Reality has a tendency of forcing opinion change.

At 4/09/2006 11:03:00 AM , Blogger Athena said...

softened some... but not really. They still think they are entitled to last years gains and they still want to price 20% above what houses sold at a year ago... because that is their money... but next year if they decide to sell, they will only price at 6-10% above what they think their value is now.

also... I have a hard time with this fanciful thinking they are doing about the demographics of Sonoma. You know what? If we had so many rich people, and so many commuters making big bucks, that would be reflected in our average household incomes...oops... still below 50k here... average household income. Ponder that one. Clearly there are not that many rich people and big buck commuters.

wow... robert- that was ome prediction. That is going to be a bigtime problem for the us economy if you are on target.

At 4/09/2006 02:27:00 PM , Blogger Athena said...

Did anyone see this from the real estate bloggers?

Complaints Against Real Estate Agents On The Rise in Arizona
One of the side effects of the strong real estate market was the influx of new real estate agents.

the rush to easy money has led to a significant increase in complaints against real estate agents statewide as the combination of a tightening market and new and unscrupulous folks engaged in selling homes has increased.

In the first eight months of this fiscal year, the number of complaints statewide is at 1,241, well ahead of last fiscal year’s total, 1,101.

Relatively few complaints result in disciplinary action, but that number is going up, too.

In fiscal 2005, 207 complaints resulted in “administrative action.” But in the first eight months of this fiscal year that number is up to 243.

The vast majority of complaints filed are against real-estate agents, but the department also lumps together complaints against offices, brokers, developers and unlicensed salespeople. via

At 4/09/2006 09:30:00 PM , Blogger Athena said...

MV- where are you?!? Have I ever got some great real estate related hollywood gossip for you! ;-D

At 4/10/2006 12:29:00 AM , Blogger moonvalley said...

Athena, tell??!!What? I've been busy packing. We've got the stuff coming out of this place into the new one and the next day the stuff from our old 4 bedroom house in LA arrives at the new place. MOre unpacking than packing.

At 4/10/2006 12:54:00 AM , Blogger Athena said...

well.. speaking of a house in la... do you know one that needs a renter? Have a hollywood writer/screenwriter friend... she was in BevH for years and years before developers came along and wanted to tear down her building to build luxury condos.

anyway... she moved the first of the year. Moved to Santa Monica and ended up lucking out when she found this cute apartment rented out on the property of Unnamed CRAZY actress. Now... the story part comes in where somehow when she rented the place and told me about it- I didn't catch the name of Unnamed CRAZY actress... at that time.

So writer friend calls me today to let me know she has had to get an attorney who told her if she went back to her apartment owned by CRAZY unnamed actress he wouldn't take her case he was that serious...

So she tells me that this perfect place has been something out of a reverse pacific heights... leaking skylights for months on end- and promises to fix them only to have it rain and it rains in the apartment. Then... the apartment came with all utilities paid- only to have said utilities shut off- and her inquiries were met with the response from the service companies that they can't disclose why the utilities were cut off- (to the Crazy unnamed actress as they were shut off for the whole property)

Demands for rent to be paid in cash... via an email no less.

Oh- and then Crazy unnamed actress moves out of her main house and into one of the other cottages on her property... and says she will rent out the main house. THEN while the skylight debacle is going on the whole time and my writer friend communicates how for two months she has not been able to unpack or get comfortable in a single room due to the leaking skylights and has had a hard time getting any work done as she is living among her boxes pulled into the center of the rooms... and crazy unnamed actress tells her not to get comfortable because she may be renting out her unit. WTF? writer friend is stunned to say the least.

Crazy unnamed actress goes out of town and sends an email to my writer friend and apologizes for the sudden announcement and feels bad and tells her of course she can stay and get comfortable and she will have her friend's lawyer draw up a legal agreement and everything that she can rent there as long as she likes and more than a year and when she does move the crazy unnamed actress will pay her moving expenses even.

THEN crazy unnamed actress admits to being crazy. But then a couple weeks later she sends another email asking my writer friend how she would feel about moving sooner rather than later and feels that having her unit empty would help her rent out the main house- and she wanted an immediate answer.

It gets worse- including crazy unnamed actress calling incessantly, banging on the doors and windows wanting writer to talk to her... barging in - breaking into her apartment, emailing her a threat- a literal threat about making a second career out of getting back at her (I like the saying of making a second career out of something though) cops being called- the police taking sane wonderful writer's side and encouraging her to get some serious legal eagle on her side because the history with this crazy unnamed actress is the only thing that works for her is getting spanked by the authorities. Oh and apparently her rentals are not legal nor registered.

good lord this would make for a great play right about now.... very topical to the bubble breeding just bad real estate behavior all over the place... I told her the reason these things happen near her is that the karma fairy does want her to write about it. LOL ;-D Including the part where crazy unnamed actress asked her to get her into the vanity faire oscar party- and when she said she could not- crazy unnamed actress crashed it and had to be carted away by security. ;-O

but... here is where I laughed... the crazy actress- when she told me the name- and I laughed my head off and said: "good lord! even I know that girl is crazy!!! Everyone knows she is crazy! How did I miss that was who you were planning on renting from? Good grief you have lived there and worked there for 20 years how did YOU miss that she was crazy?"

anyway... wonderful writer friend is camping out for a couple weeks elsewhere until she finds a less crazy person to rent from...

Anyway- any guesses on who this 40ish CRAZY unnamed actress is?

hint... in a movie she was tossed off a building by her husband. ;-)

At 4/10/2006 01:06:00 AM , Blogger moonvalley said...

Good Sean Young renting rooms out now???? Do tell., who is it..We lived in Santa Monica for 17 years. I thought I knew all the crazy actresses there.
PS ..
My husband refuses to go to sleep until you tell us.

At 4/10/2006 01:08:00 AM , Blogger Athena said...

bahahaha!!! You are my FAVORITE!!!! I KNEW you would get it in a heartbeat!

You remind me of my writer friend anyway so I told her I would be telling you this and I made a bet that you would get it JUST on the description alone! :-D

At 4/10/2006 01:11:00 AM , Blogger moonvalley said...

She is really and truly stone cold nutz!!

At 4/10/2006 01:16:00 AM , Blogger Athena said...

Oh I KNOW!!! certifiably INSANE. but even after I told wonderful writer that even I know crazy actress is crazy... she said her momma who lives in podunk south carolina was in the grocery store talking to another little old lady and telling her the story-- and THAT little old lady said: "good grief, everyone knows that girl is crazy!" ;-D

anyway... I told writer friend to get to writing right now- and get the darn thing in production because it is such a great social commentary.

She made me make a deal with her- that is she writes this one I have to send her a piece I have been sitting on for a long time so she can outline it and force me to get it done. LOL... I think we should hook her up with Avalon players and turn hers into a play!


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