Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Sunday, May 14, 2006

Dear Lenders, There Will Be Pain.

Interesting Reading from Resource Investor.

The California Housing Market

"Roughly 80% of San Diego homebuyers chose adjustable rate mortgages in both 2004 and 2005.

Home sales are down 46% in Sacramento, 30% in San Francisco, and 50% in Los Angeles/Long Beach, year-over-year."

ARMs in Sonoma County
2003 - 36.8%
2004 - 59.4%
2005 - 69%

"From the New York Times: “A house at 57 Marina Boulevard in San Rafael, across the bay from San Francisco, was originally listed at $1.45 million.(probable typo in the NY Times... price should be $1.045 million) The owner recently dropped the price to $949,000 when a competing house on the same street lowered its price to $959,000, from $989,000 ... In Marin County, the prices of about a quarter of all listings have been reduced .... In Santa Cruz, inventories have tripled to 124 days, from 42 days.”'

"As for the idea that California’s population will keep growing because everyone wants to live there, real estate analyst Rich Toscano at notes that San Diego’s population actually shrank in 2005."

'"But it's even worse than that, because much of the population growth of recent years has been due to births. Until Countrywide goes live with their Fetal Lending Division, we can probably just focus on migration: people moving in and out of San Diego (or, put another way, population growth with the effects of births and deaths removed).”'

"Analyzed this way, it turns out that for three years running, more people have moved out of San Diego than have moved in - and the trend is strengthening."

The Housing Market in General

"That some formerly hot markets are imploding is common knowledge by now. But it’s still fun to see the numbers and hear the stories."

"From the Honolulu Star Bulletin, May 6: Honolulu home sales down 41% year over year in April, and Maui condo sales off by 50%."

"The New York Times, May 9: The inventory of homes for sale in the Fort Lauderdale area has quadrupled, year over year, to 20,000."

More from the New York Times: “For the first time in nearly a decade, you can smell the anxiety. The listing agent for a four-bedroom home on Scripps Trail in San Diego informed other agents in the multiple-listing service that a "very, very motivated seller will entertain all reasonable offers" and "will help with closing costs."

"The house was listed in September at $810,000. After a previous price cut, the seller is now willing to entertain offers as low as $685,000. But they didn't attract much interest…Inventories in the San Diego area have risen 25% in the last year, to more than 19,000 unsold homes, a record.”'

"A final word from Rich Toscano: “There has been zero upward price pressure this spring, for the first spring in who knows how long. It looks like things are truly going to start falling apart.”'

"Dow Jones Newswire, May 8: “Preliminary reports from builders Hovnanian Enterprises Inc. (HOV) and Toll Brothers Inc. (TOL), whose quarters ended April 30, indicate demand is falling faster and more sharply than previously thought, and that the pullback is no longer confined to hot markets that had seen sharp home price run-ups in the past few years. Hovnanian's orders fell 20% in its fiscal second quarter - an about-face from the 5.5% order growth reported in its fiscal first quarter. Toll's orders declined 32%, which is steeper than the 29% dropoff posted in its fiscal first quarter."

"For Toll, the order decline was across the board as all of its geographical regions reported year-over-year decreases in demand. Chairman Robert Toll attributed the declining demand to higher cancellations and to speculative buyers who are dropping out of the market and putting the homes they recently acquired up for sale. Although Toll said his company doesn't sell to speculators, “we have certainly been impacted by the overall increase in supply.”'

"According to real estate consultancy Majestic Research, new-home sales in all 40 markets it tracks fell during February and March."

"The major homebuilders, instead of pulling back in the face of falling sales, are apparently trying to make it up on volume. According to Dow Jones, “Toll Brothers plans to open 80 communities during the next six months, and expects to wrap up fiscal 2006 with 295 subdivisions, up from 230 in fiscal 2005.”'

Household Debt
"As all those adjustable rate mortgages ratchet up, it’s getting harder for last year’s marginal homebuyers to make ends meet. According to real estate consultancy RealtyTrac, “A total of 323,102 properties nationwide entered some stage of foreclosure in the first quarter of 2006, a 72% year-over-year increase from the first quarter of 2005 and a 38% increase from the previous quarter.”'

"In 1990 American families owed banks, car dealers and credit card companies about $3.6 trillion. Today we owe nearly $12 trillion. The cost of servicing this debt eats up about 17% of disposable income, a level typically associated with the onset of recession."

"And since much of this debt is in the form of variable rate mortgages and adjustable rate credit cards, its cost is ratcheting up as rates rise across the yield curve. Not the profile of a society about to make mortgages a growth market."

"What does all this mean for banks? Well, since they make money by lending it out and getting paid back, a crash in home sales and a spike in defaults would seem to be a bad thing."

"As Fleckenstein Capital’s Bill Fleckenstein put it in early April: “It is indeed the financial institutions that are most at risk in the real-estate market (which is not to say that consumers and speculators won't get hurt)."

"The lenders will bear the brunt of the pain, because in many cases, they loaned the entire purchase prices of many homes. As I have said often, the housing bubble has been more a lending bubble. It will be the impairment of the financial institutions that will stop the flow of credit to the real-estate market. In turn, that will accelerate the collapse in house prices somewhere along the way.”'

"So Wachovia has done us two favors with one stroke of a pen. First, it has validated the idea that the longer a credit expansion goes on the crazier bankers become."

"Second, it has handed the Sound Money community another classic short. When the housing crash moves from business section to front page, and stories of dispossessed formerly middle class Californians are everywhere, and bad loans are chewing through bank income statements like demented termites, the owners of Wachovia LEAPS puts will be rich."


At 5/15/2006 09:29:00 AM , Anonymous Anonymous said...

credit card companies can treat accrued unpaid interest as income for 6 months... wasn't 34% of world's net profit in q1 "accrued,unpaid interest on neg am loans" certainly have a vicious sense of humour

At 5/15/2006 10:19:00 AM , Blogger Marinite said...

As has been mentioned on my blog, socketsite, and others, that "1.45 million dollar" San Rafael house report is likely a typo. It should be 1.045 million dollars.

At 5/15/2006 11:07:00 AM , Anonymous Anonymous said...


You kill me... I've only read the title and the graphic and I'm already cracking up!!

At 5/15/2006 01:41:00 PM , Blogger Athena said...

:-) my sense of humor was relegated to only the title and graphic on this one... I let the original author do all the talking. ;-)

Stay tuned though... I have yet to post this week's realtor article from the local paper... I have much to say about that one.

At 5/15/2006 02:59:00 PM , Blogger moonvalley said...

Oh my oh my...just listening to that insane RE show on KSVY this afternoon coming home form lunch. Did you know that all those Neg AMs are a grrreat idea. Yes, people were uncomfortable with them at first, wary as they were with any new thing, like the bi-plane and the horseless carriage but hey, look how they caught on, and what great ideas they were.
These people are driving the bus to crazytown.
What I learned:
RE never goes down in Sonoma.
RE always goes up in Sonoma.
Get a jumbo neg am, arm whatever fast before it goes up even more.
Even if your ARM goes up it's all good cause, housing is going always ever upward, Excelsior!
Also on another note, my ex-neighbor dropped by and he is putting his money into that over-priced chitbox in the Springs. Partnering up with a pair of flippers, another sucker and a RE agent, what;s not to like about that deal.
And hey, they;ve made three offers on the place already, they're hoping to get it this time for only 799k. I'd told him I've been staring at the same dump online for over a year, no takers. He said, "I know you advised me not to, but I really really need to do this.I need a place to live." My husband said "a fool and his money..."

At 5/15/2006 03:26:00 PM , Blogger Athena said...

good grief! Which springs place is this? There is nothing but ICK going on in the springs... and El Verano too.

Did you notice all the rentals now available in the paper offered by the realty companies?

Oh as for those jumbo neg-ams... did you read the realtwhore article on Sunday?

Begging the buyers to come out from wherever they are hiding and telling them all about the Interest Only loans they can get so they can afford their overpriced chitbox for at least 5 years.

It was beyond lame.

I heard a local countrywide agent saying that 80% of their customers have been choosing the Neg-Ams here in Sonoma.

Wonder how that is going to work out for them?

I think we are going to have a lot of doctors running x-rays that look like the graphic posted above.

At 5/15/2006 03:57:00 PM , Blogger moonvalley said...

I don't want to post the place as I don't quite know who all reads this, leave it at I'm sure you'd recognize it.
I haven't looked at the RE ads this weekend as I'm going full tilt toward this deadline.
Begging the buyers to come out from wherever they are hiding and telling them all about the Interest Only loans they can get so they can afford their overpriced chitbox for at least 5 years.
yes, that's truly scarey telling people to get.these crazy loans that depend on how long they want to stay in the house. My husband asked our ex-neighbor what happens to his investment if the prices go down and his "partners" want to get out. He didn't have any answer for that, just "the agent said it will go up again". I can't understand flippers buying at this point in the market run.An RE agent too, must have only had their license for a short period of time.

At 5/15/2006 04:08:00 PM , Blogger Athena said...

eek... I know someone who may have become one of the latest great unwashed initiated into the RE ranks... and one of the conversations we had about RE before I became thoroughly disgusted was that he wanted to find someone to flip houses with... yikes. I hope I don't know the fools going into the slaughterhouse with your neighbor. :-/

At 5/15/2006 05:16:00 PM , Anonymous tom stone said...

insanity is one in their right mind would try to flip a property in sonoma county right they are not in their right mind...has anyone told these folks that an "incredible deal" is just that...and that when they say it is and "unbelievable investment"..they might be telling the truth for once?is that "pixie dust" you mentioned in a previous post pcp,or something stronger?

At 5/15/2006 06:28:00 PM , Blogger Athena said...

Between the day I've had and reading this tale of the unbelievably clueless flippers ...all I can say is... I need some of whatever they are taking that makes them believe in such fairy tales... or a drink... and I don't even drink.

At 5/15/2006 07:06:00 PM , Blogger moonvalley said...

I was just going to say that myself..I don't drink either and after hearing this, I wanted to hit the wineries.

At 5/16/2006 09:46:00 AM , Anonymous tom stone said...

athena i suspect they have been washing down a mix of pcp and lsd with cheap vodka judging by their statements and decisions...i haven't had a drink in years,but i do have to work on my breathing to calm down after i read some of this's like watching a teenager riding a powerful motorcycle with bald tires wearing nothing but shorts and a t shirt.

At 5/16/2006 12:16:00 PM , Blogger Athena said...

Tell me about it. Most of my friends are pretty smart cookies. But I have the occassional cousin or two who make less than half of my salary combined... who shake their head at me and tsk tsk me for not buying an over-priced pottery barn painted chicken coop. WTF? That makes me nearly break out in hives. They have debt that will last long after they are on the other side of the dirt... where does this mentality come from? and why do these FB's want everyone to join their party?

You know, it reminds me of when you smell something really nasty and you of course react by saying: "eeeew... disgusting... here, smell this!"

Why do people do that?


At 5/17/2006 01:53:00 PM , Blogger Marinite said...

where does this mentality come from? and why do these FB's want everyone to join their party?

The same reason why they became FBs -- they saw everyone do it so they jumped on the bandwagon. Now for assurance they want you to do it too since maybe they are seeing people get off the bandwagon.

At 5/17/2006 03:54:00 PM , Blogger Athena said...

You know when I was little I used to cry to my dad that I just wanted to be like everyone else!!!!

His response was: "well, you AREN'T like anyone else so get used to it!!!

I got used to it... its pretty safe to assume that if everyone else is doing something... I won't be. Can't help it... was just socialized that way.


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