Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Monday, May 29, 2006

Neighborly News

The following is an article about Fairfield, CA and comments from Sonoma Housing Bubble Reader, Ali in Cali.

Thank you Ali! (Ali's comments in purple)

"The following appeared in an article in the Fairfield Daily Republic in the Business section on Sunday, May 21, 2006.

Their website is for registered users only, which I doubt is worth the subscription fee, so I have included the excerpt that I think is most relevant below. Enjoy!"

Slowing Housing Market Requires Attitude (Adjustment?)
By Nathan Halverson“

…Look at the numbers.

"In May 2005, 335 homes were listed for sale in the area of Cordelia, Fairfield, Green Valley, Suisun City, and Vacaville. This month, that number jumped to 1,231 homes for sale, an increase of 267 percent, according to Multiple Listing Service."

"Meanwhile, the number of properties sold declined 30 percent in the last year according to Bay area Real Estate Information Services. In April 2005, 373 properties sold in the northern part of the county. This April, sales were down to 260 properties."

"Why to still buy ...Nathan Fitzgerald, an 18 year veteran with Prudential Realty in Fairfield who monthly provides his clients with numbers like the ones above, said he thinks home prices will be flat to slightly decreasing in the coming months."

"And he doesn’t hesitate to tell that to his clients.“They look at me like “why would a Realtor tell me that?” Fitzgerald said. But Fitzgerald points out that just because prices are declining, doesn’t mean that potential buyers should wait."

"Here’s and example why: Say you could buy a house today for $465,000, which is the current median home price in Solano County, or wait two years after it’s price has declined 10 percent to $418, 500."

"But, during those two years interest rates for a 30-year fixed mortgage increase from 6.55 percent to 8.55 percent. Is it worth it to wait? In this scenario, you should buy the house now."

"Here’s why: The monthly mortgage payment for the more expensive house at today’s prices would be $2,954."

"The payment for the less expensive house, but at the higher interest rate, would be $3,232."

"Both payments assume a $30,000 down payment."

"The house you waited two years to buy for a 10 percent discount would end up costing you $278 more a month, or $8,340 during the course of the loan."

Keep in mind that this is only an example.

My questions are:

1. When I do the math, an extra $278 a month times 360 payments (30 years x 12 months/year) = $100,080.

At 12 payments (one year’s worth) the figure comes out to be $3336.

Thus, I have no idea where this person is getting this figure of $8,340. If the intention is to scare the buyer into hurrying up, wouldn’t the $100,080 figure be more effective?

The arithmetic alone here makes me wonder about the accuracy of any of this.

2. This example assumes that prices will only fall 10% in the next two years. What if they fall more? And what if they fall faster? If the sales prices drop more than 10% in two years, or drop 10% much sooner than this projection, does the example still work?

As long as the sales drop faster than the rates increase, I think this example is rendered useless. Am I correct?

3. I guess the figure is assuming a 10% drop from today’s prices, but have they taken into account that prices in many markets have already dropped since last August’s peak?

4. What about the money that the owner will be saving on the property taxes over the lifetime of living in the home? I know it is minimal, but I think it is unfair to disregard that the person who waited until the price dropped from $465,000 to $418,500 would be saving an additional $500+ a year in property taxes.

To me this is just more Realtor propaganda. Is it possible that this reporter’s source is baised? Is it possible that Mr. Fitzgerald would say this to his clients since he needs them to still buy otherwise he is out of a job?

Is it possible that I am going to see right through this pile of BS, but others will use it to run out and make a bad decision in this very tentative market? God, I hope not.

Buyers of the world: UNITE! Or, at least use your heads…


At 5/29/2006 01:38:00 PM , Anonymous Anonymous said...

If you pay an inflated price you cannot get your money back. If you are borrowing money at an inflated interest rate you can always refi at a later date at a lower rate. As I see it, 30 years is a long time.

Plus, the assumption that monthly payments are the key to affordability ONLY when the market is increasing is BS. The same should follow when interest rates are rising and monthly payments are increasing. Buyers will respond to potential higher monthly payments by NOT BUYING.

How do you know a realtor is lying?
You know the rest.

At 5/29/2006 02:49:00 PM , Blogger Athena said...

Buyers will respond to potential higher monthly payments by NOT BUYING.

I agree. Here in Sonoma there is a definite stand off. Sellers feel entitled to their 20% gains for the last few years. They told themselves their property was more valuable, they spent their equity, bought new cars, upgraded their countertops and they are all listing their houses above half a million dollars.

It is laughable, because it really is just a seller standoff. They think they are standing off against buyers who simply don't want to pay their prices, but the reality is they are standing off against a population that can't afford their prices. They have exhausted their market.

The first couple years of the bubble there were people who were buying from outside the area, or had moved here for tech jobs. 6500 tech jobs were created and peaked in 2001. Sonoma County lost 90% of them. All the jobs created since then...none have compared to the average salaries paid to the tech workers. You would have to work three jobs at the average wage to come close to having the income to afford buying a house at the median price.

What does that tell you Sonoma?

Last year 69% of loans were of the high risk variety where people had to buy based on how low they could get the payment.

It would be nice if the people were qualified for the reset amount... but we all know that is just more magical thinking. These people qualified with stated income, or on the introductory payment alone... were likely told they can refinance or sell and make a butt load of money because real estate only goes up. We know these people could not have qualified for the loan at the reset amount, or the fixed rate loan qualification simply because we know it takes 3 people making the average wage in Sonoma County to be able to qualify.

So... buyers are scarce... guess why? Because prices are to high. They will come down. But there will be pain involved.

At 5/29/2006 06:18:00 PM , Anonymous tom stone said...

i would be very surprised indeed if solano property only declined by 10% by this time next year...i would be very happy to take bets from anyone who feels otherwise,stakes to be held by a neutral party...oh gambling is illegal? shoot.sellers who hold out in this market are just going to prolong and increase their loss and their stress...more divorces,drunk driving arrests,suicides.i hate unnecessary pain...

At 5/29/2006 09:08:00 PM , Blogger Marinite said...

All things being equal, if interest rates rise X%, the asking price on a house must decrease by Y%. I am too lazy to do the math.

This article does not seem to do that calculation either. Rather the author is pulling numbers out of his arse and basing his article on them. How typical.

It seems to me that it is always better to buy a house when interest rates are at their highest, not lowest. The reason is that sale prices must adjust downward as interest rates increase (all things being equal), and you can always refi to a lower rate as interest rates come down.

At 5/30/2006 11:45:00 AM , Anonymous tom stone said...

marinite,real estate is very seeldom perfectly balanced and calling the top or bottom is a nice general there is a longer lag between interest rates rising/ prices falling than when rates are falling/prices rising...mostly due to the psychology of sellers.however i would much rather pay less for the home/higher interest especially sine real estate tends to overcorrect and real buys can be had near the bottom(i don't have to call the timing so nicely)and i expect the prices to bounce along the bottom for a good long time like catfish bait(chopped liver works well)

At 5/30/2006 12:51:00 PM , Blogger Marinite said...

marinite,real estate is very seeldom perfectly balanced and calling the top or bottom is a nice general there is a longer lag between interest rates rising/ prices falling than when rates are falling/prices rising

I was speaking more ideally/theoretically. The real world is messier.

At 5/31/2006 10:18:00 PM , Anonymous Ali, in Cali said...

Holy cow! I can't belive I am just now seeing this! Thanks, Athena, for posting! Glad to find some folks who actually agree with me! Everyone's else is so caught up defending their entitlement to everything they stand to lose...

At 5/31/2006 10:20:00 PM , Blogger Athena said...

anytime Ali! Thank you for the participation, article and observations. Keep them coming!


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