Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Monday, May 01, 2006

What Would a Smart Person Do?

"Anybody thinking about buying or selling a house this spring probably is asking these same questions:"

"In terms of historical real estate cycles, is this a smart time for me to be in the market?"

"After a record five-year boom in prices and sales, isn't it obvious to everybody that the party is pretty much over -- especially in the high-fizz, high-cost markets of the West Coast, Florida, Washington, D.C., Phoenix and Las Vegas?"

"Won't rising mortgage rates and fast-accumulating inventories of unsold houses cool the market even further in the months ahead? Could appreciation rates sag -- or actually swing negative -- making any purchase I might close this spring look like a dumb move a year or two down the road?"

"Some conclusions relevant to the questions posed above about timing and cycles and profits and losses:"

• "Anybody who thinks home real estate values can't go down is simply out to lunch. When local economies lose jobs, demand for houses drops and so do property values. Markets where prices have accelerated in part because of speculation by investors are particularly vulnerable when local economies go flat."

• "The risk of loss is accentuated for purchasers who do not hold on to their properties for extended periods of time. The longer you own a house, the greater your probability of making net profits on it, even if the local economy hits the skids for a while."

"For example, looking at all 50 metropolitan areas during the recession-impaired 1991-1995 time period, owners who sold after just five years of holding experienced the biggest losses, with 12 percent of owners suffering net losses of about 10 percent. People who purchased during that period and hung on for 10 years ultimately made net returns, despite the intervening recession years."

"Between 1996 and 2000, buyers who sold their houses within five years of purchase had a 1-in-20 chance of losing money on the transaction, with losses averaging 10 percent. Between 1986 and 2005, 99.6 percent of home buyers who held on to their houses for at least 10 years made money."

"The upshot: Yes, timing matters. If you buy at the top of an inflation cycle as a speculator and sell into an economic down cycle a couple of years later, you can lose a bunch of money. But if you buy a house and live in it for five, seven, 10 years, the odds are good that you'll come out ahead -- even if, like Milner, you bought at the wrong time upfront."

However, when a community has 70% of home buyers in risky adjustable mortgages they took out believing they would/could sell before their interest rate resets and make a profit... How do you think that is going to work out when these same borrowers can't AFFORD to hold on to their houses for 5 or 10 years? They couldn't even afford to buy them in the first place or they wouldn' t have resorted to suicide financing.

"Housing appreciation in the Bay Area dropped below double-digit figures for the first time in more than two-years in February, according to DataQuick Information Systems."

'"We're in a definite market cycle. The market is adjusting right now," said Ed Krafchow, president and co-owner of Prudential California, Nevada and Texas Realty. "We're not in a buyer's market. We're in a buyer's sympathetic market."'

"But any sympathy cards might have to be directed to sellers who have enjoyed rapid appreciation in recent years."

Perhaps you should think about sending a sympathy card to the owners of the next open house you cruise through explaining why you will not be taking part in their ponzi scheme?

'"Unsold inventory rose again in February to a 6.7-month supply, one of the highest inventory levels in several years."'

"That means it would take 6.7 months to sell all homes on the market at today's sales pace, and it has some worried the housing slowdown could be more painful that expected."

"This is a spotty market," said Prudential's Krafchow, who says he's weathered three or four real estate cycles over the course of his career. "There are pockets of real active areas, pockets with little activity and some with no activity at all."

"He points to Oakland's popular Montclair neighborhood as an area where home sellers are still receiving multiple offers. But he cites Marin County as an area of concern -- despite anecdotal evidence suggesting that Marin is still doing well."

'"A $4 million house is a discretionary purchase," Krafchow said."

"That point is echoed by others."

'"The activity where there's more discretion in the buying decision seems to be much more slower," said Paul Zeger, president of San Francisco-based Pacific Marketing Associates."

Real estate agents also are seeing more buyers sit on their hands as long-term interest rates have begun to move higher in recent weeks.

"Home builders are moving aggressively to unload inventory since they have to pay carrying costs for unsold properties."

"Centex Homes sparked a buzz in January with its advertisements touting price reductions of up to $100,000 for new homes in San Ramon and other Northern California cities. Now price reductions on new construction are a common feature of the Sunday real estate ads."

"Outright price reductions -- rather than help with closing costs or throwing in free upgrades -- raises the concern that comparable sales will begin to fall, making it difficult for other buyers in the market to secure financing especially in a rising-rate environment."

"The attitude has changed," Zeger said of sellers. "It has turned very much to, 'What can I do to help you?'

"Everyone is offering an incentive," Zeger said.

"But Wells Fargo CEO Dick Kovacevich told shareholders at the bank's annual meeting April 25 that he's not worried about a national housing bubble because of the local nature of housing sales."

'"There hasn't been a 'national' housing market since the Great Depression," Kovacevich said."


At 5/01/2006 10:04:00 PM , Blogger Marinite said...

"Won't rising mortgage rates and fast-accumulating inventories of unsold houses cool the market even further in the months ahead? Could appreciation rates sag -- or actually swing negative -- making any purchase I might close this spring look like a dumb move a year or two down the road?"

As I just realized (I know, I am slow), it is even worse when you denominate the price of a house in terms of an ounce of gold. Go see my latest post to see what I am talking about. It was an eye-opener to me.

I'd love to know what this graph looks like for Sonoma.

At 5/01/2006 10:09:00 PM , Blogger Athena said...

Pardon me neighbor, but could you spare a wheelbarrow full of gold?

At 5/01/2006 11:41:00 PM , Blogger moonvalley said...

I felt so proud of myself on Sunday. The neighbor I've mentioned before, who's about to come into some money and wants to "grow wealth" in RE came over to the house. This time I took him into our office , sat him down and showed him Zillow, Zip Re, and
I showed him the house he's thinking of buying. I showed him how it sold a few years ago for 200k. I showed him how the current "owners" are now trying to unload it for 800+k. I showed him the graphs that showed what RE in the area had been doing for the last 10 years, how it had basically been flat and then leaped up suddenly all of a sudden, He was stunned.
After he sat for a moment thinking, we then sat down and looked at some other places an un-named Re'er had been pushing on him. He just shook his head. Then we sat down and looked at rentals. He finally got it.

At 5/01/2006 11:58:00 PM , Blogger Athena said...

Oh I am SO excited for you! YAY!!! I told you our unnamed family member also decided the mcmansion was a bad idea. My mother was sure to tell me that the unnamed family member did not change her mind because of anything I said. She said the real reason was because of the loan... the loan concerned her. (a take it in the butt loan at her age just could not be a good idea!)

Apparently nothing else I said was compelling. I mean how could any of that be true?

You know, real estate never goes down. You can't lose. Everyone wants to live here. There are lots of rich people moving here, and we have a lot of people who commute to high paying tech jobs out of the area... ;-D

So I didn't succeed in transferring any economics 101 information, but do I get at least half of a brownie button for preventing the county from having one more F'd borrower?

At 5/02/2006 09:33:00 AM , Anonymous tom stone said...

i was talking to my world rep yesterday,he has an arm about to reset and was talking about doing a refi to another hybrid...i asked him how much th lifetime cap had gone up this year...40%...i asked him if that didn't indicate where his employers thought rates were going...and asked him how long most world loans took to pay off/refi.(5-7 years)i told him that showed what his emloyers expected in 5-7 years and suggested he run the #' and see if a 6.53% 1 point loan might be cheaper.(than a 12.9%mloan) we'll see.

At 5/02/2006 09:40:00 AM , Anonymous tom stone said...

just looking through a "harrisonn's guide to appraisal,"income must be related to house a rule families cannot afford to pay more than two to three times their annual income for a house"this is the standard appraisal text...

At 5/02/2006 03:30:00 PM , Blogger Athena said...

LOL... well when did that rule get punted from the industry?

That is my rule too... I refuse to pay more than 30% so if the prices represent more than that and there are not incomes to support it- we have a problem. 3x my income should buy someone a pretty decent house... but not here. It would buy me someplace that I wouldn't want to live in... and I know my income is well above the average in sonoma... so what does that say about how precariously we are sitting on the edge of the bubble?


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