Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Wednesday, June 07, 2006

Buyers Don't Like Over-Priced Crappy Houses

It always throws me off when too many things come up and interrupt my lounging around and research routine. So this news is a bit late...

This past weekend's real estate section in the Sonoma Index Tribune, had another article of some interest by a local realtor.

The topic of the commentary is on finding and keeping buyers, and keeping them happy. Starts off with:

"This should be easy- right? With many qualified buyers in the wings and still excellent interest rates, surely your home will make one of them happy at a price that makes you happy. But if you really want that qualified buyer to stay in the transaction clear through to the closing, it may help to understand a bit more of the stress issues for buyers these days."

(I guess she didn't see Lereah on his knees today groveling to Ben Bernanke while Ben showed him horns.)

David- “‘Experiencing a slowing from a hot market is a good thing because we need a solid housing sector to provide an underlying base to the economy, and slower appreciation will help to preserve long-term affordability,’ said David Lereah, the group’s chief economist.”

“‘But this is a time for the Fed to pause on rate hikes because we have some interest-sensitive housing markets that have become vulnerable,’ he said.”

Ben- “...vowed to combat the recent ‘unwelcome’ pickup in inflation, even as he told an international bankers’ conference that an economic slowdown ’seems now to be underway.’

‘He came right out and said we’re worried about inflation,’ said market analyst Arthur Hogan.” Stocks plunged.

Back to my commentary on the realtor’s commentary....

With all the "many qualified buyers" why have sales dropped so steeply?

And about those interest rates…apparently David Lereah’s concern is of no concern to this realtor. It must be different here. But just for the record the interest rate is of less interest at this time than the price.

The prices are at all time bizarre and bubbly highs. Sonoma really didn't get more valuable in five years. Sonoma became a target for speculation in the last five years with estimates (from a handful of real estate agents) that 30-40% of purchases in the last few years being speculative "investors."

Excess speculation drove the prices to ridiculous heights... One would be better off buying a house for $300k at 15% interest than buying a $600k house for 6% interest. The 15% will come down over time. The 6% will go up over time. Do the math.

Back to the realtor's thoughts....

"First- on the skirts of an overheated, (she got that right) rapidly appreciated market, (she means unsustainable, specuvestor driven bubble market) dismay reigns supreme among most buyers.” (Right, most buyers don't want to pay more for something that isn't really worth more)

“They come looking for a dream home and discover that after paying taxes on the great sale in other parts of California or across the nation, they do not have as much cash as they had expected.”

(wait... here comes my favorite part...) …”AND they really did not realize how universal is the remarkable increase in property values we have seen throughout California in the last few years.”

bwahahahahahaha... good lord! Are you kidding me? This is the lamest shameless appeal begging to legitimize the erroneous bubble prices by calling them UNIVERSAL!!!! bwahahahaha... universal?

Do I really need to say this? The specuvestor craze certainly has hit California, as well as areas all across the country, and prices have reflected the greedy appetites of those foolish enough to jump into the pyramid scheme, however VALUE has not increased, and most certainly there is no universal value appreciation.

She gets a biscuit though for coming up with such a creative assertion and making me laugh out loud.

"Plus many buyers from urban areas have little notion of the added value more land brings to a property. So looking at limited inventory with higher prices than they had imagined, with the continuing possibility of being in a multiple offer scenario on places that do not quite meet the "dream" standards can become very discouraging.”

Translation... people who sold nice houses in areas closer to jobs that pay salaries that perhaps can justify the housing prices, are shocked and disgusted that people in Sonoma with their fixer-upper crapholes with a brown lawn and cracked linoleum, warped walls, dry rot and termites, are pricing their houses, as if everyone wants to live here.

There is no limited inventory situation in Sonoma County, and as far as that multiple offer scenario...
WAKE up honey! You are dreaming again.

This isn't 2003 with specuvestors lining up to outbid each other.

We are in June of 2006 and it’s all over honey.
All Over.

Even A.G. Edwards' analyst Greg Gieber said today: The Soft- Landing Theory is Dead.

Well, it was always dead, but those employed by the real estate/lending/building industries have tried to make that dead bird fly anyway.

It’s dead. Stop playing with it. You killed it.

Just like my cat when he plays with the bird too long and it dies, and no longer creates that fun game where it flies away from him and he catches it again, and he throws it up in the air trying to make it fly again. It’s dead. It is really, really dead.

Back to the realtor commentary:

“Next- in a certain state of desperation after having lost out on several properties, a buyer bids aggressively on a wonderful new listing, determined to the "bride" in this transaction and not just another "bridesmaid" in back-up position. Suddenly they find themselves in a frenzy of paying for a number of relatively expensive inspections. Most buyers understand that this is good money to spend on a property valued at hundreds of thousands of dollars. Still when the tabs pass the $1,000 plus range, it does give a buyer pause.”

Multiple buyers? Not right now sweetheart. Maybe in areas that still have deaf, dumb and blind specuvestors still roaming about... but she is right about what it looks like when buyers start coming to their senses in the middle of a transaction, when they realize they are about to mortgage their souls and pay more than double the cost of renting the same crappy house just for the pleasure of renting it from the bank indefinitely.

"Finally, reports are received noting extensive termite damage, the gutters rusted and leaking, significant dry rot under two of the bathrooms, a faulty electrical system- and that's before they discover the well water has to be treated. It is easy to see panic set in.”

ya think? bwahahahaha... good lord!

"Here is this very expensive property which is now going to cost an additional $25,000 to $50,000- or more- to bring it up to buyers' expectations. Who wouldn't feel discouraged and experience some definite remorse?" You got that right. Talk about a neon sign flashing telling the great big fat fool that they are the great big fat fool. "To add to the devastation, the seller has insisted on having the buyer sign an "As-is" addendum, making it very clear that they do not wish to spend another dollar on the property."

bwahahahahahahahahaha.... the greedy scammers!

Tea almost came out my nose reading that one.

These absurd sellers were taught this behavior by the realtors in the first place, blowing sunshine up their butts- with their cheerleading mantras of:
"everyone wants to live here," "real estate only goes up," "you can't lose," "someone will pay for it, even if it is falling down, because it is different here."

Merde like this has lined quite a few pockets in the last few years.

"The buyer now has several choices: walk away from the deal: (my advice is run... run like wind before you become the biggest fattest fool in the valley, and MV and I have to point and laugh when we walk by your house) close the transaction knowing that large sums of money will be required to bring the home to their standards or approach the seller through the listing agent with a counter proposal for sharing in the "surprise" costs."

"No surprise- none of those choices feel really good. Frequently, the last one will seem the best and taking a deep breath, the buyer says cautiously: 'Do you think they would negotiate on the roof repairs?'"

"The truth is the agent receiving such an inquiry rarely has an answer.” (No kidding) “Even the seller, who was so firm about not participating in any repairs, may be uncertain of what he/she wants to do.”

That’s because they were told their craphole was worth tons of dough simply because it is right here in magical Tinkerbelle blessed Sonoma. They believed their realtor friends who told them this and therefore, they are entitled to their over inflated price and should not actually have to do anything to earn it. It is the thing to do to live like slum renters and make profits like investment bankers. (thank you Dinor)

"Keeping the request clean and simple is the bet way for all parties to determine what position works for them."

Well isn't that diplomatic? Is that a subtle way of telling the buyer not to say that they want nothing to do with this overpriced chithole to the seller's face?

I think it is probably best to go ahead and tell the truth. If you find yourself looking at a house with dry rot, cracked foundation, faulty wiring, rotting floorboards, peeling paint, etc... Just go ahead and grab your midsection, double over while holding the pricing flyer and laugh out loud... no, no...
I love that word... just give a big long GUFFAW
right in front of the realtor, even better if the owner is nearby.
Don't bother putting in an offer. Don't bother even considering undertaking the expensive inspections... you can see what is coming by looking about at the open house... Just GUFFAW... loudly... and bring someone with you, as guffawing is contagious and it will get uproariously funny when multiple lookie loos join in on the fun. I think the realtors and the sellers demanding improper gains will get the point much more effectively this way.

"A buyer is well advised to wait until all reports are received. (nah, don't even bother getting them... try the advice above... much cheaper I promise.)

"Coming to the seller after the pest inspection, then again after the roof inspection and yet again after the contractor's inspection will not sit well."

bwahahahahahaha... At this point the seller is the one who should be embarrassed, and as Dinor says... if the offer you give to a seller doesn't embarrass you, then you are offering too much. This is investment advice. The rule is buy low, and sell high.... It is a rule for a reason. Don't break it.

"Once all the information is in, sit down with your agent and draft an addendum detailing you concerns and making specific requests for participation by the seller. Sellers can participate in the form of a credit back to the buyer in escrow, completing the problematic repair, or adjusting the price."

More investment advice: Always make them adjust the price. You always want the lowest price... buy low... buy low... buy low!

"The form of cooperation that works for one may not work for another, but the idea is to acknowledge that no one really wants the transaction to fall apart for a few thousand dollars."

bwahahahaha.... Translation: The seller, realtor and mortgage broker really, really want your money. Please don't start using your head now.

... and it is NOT just a few thousand dollars. I realize when prices are speculation driven high and above the half million dollar mark... $25,000 and $50,000, and another $100,000 in repairs and renovations may seem like a few thousand... but it is big money that you will OWE.

At these prices you should be seeing a bunch of great big flashing red lights and fire engine sirens going off telling you that this is a BAD IDEA!!! Listen to the sirens and heed the flashing lights. Use the force Luke!

"What is true is that most sellers have a real pride of ownership in the property they are marketing.”

Translation: Sellers are emotionally attached to their property and feel entitled to perverse gains because they have been drinking the "its different here" kool-aid.

Advice to buyers... don't drink the kool-aid. It doesn't always go up, and you really can lose.

"Often it has been their home for a number of years and reports of the deferred maintenance and repairs takes them by surprise."

What? houses need to be maintained? What? they need new roofs and electrical inspections? What do you mean? Like I said… living like renters wanting profits like investment bankers.

"Buyers are living on a thin edge today. Elevated (read: speculation driven highly inflated) prices and uncertain economic times mean that most of them are stretching mightily to make this transfer work. And many sellers are receiving unheard of gains (read: preposterous gains) for their homes.”

“So be a little generous, sellers... pitch in and help make the transaction work if you have a good buyer working hard to stay happy with his/her choice. Remember, you are not the adversary of your buyer. You both want the same thing: a successful transfer of ownership where no one feels "ripped off".”

LOL... well if anyone is buying a chithole in Sonoma for today's prices... they are getting ripped off. Investment reminder: If you are not embarrassed by the offer you make, then you are offering too much.

Now here is some decent advice from the realtor:

"And when all else fails, try a price adjustment! There is little that is sacrosanct about today's prices - and price really does overcome all objections."


At 6/07/2006 10:19:00 AM , Blogger Marinite said...

Buyers don't like over-priced, crappy houses!? Tell that to your average Marinite. That's 90% of the Marin housing stock. I am going to have to blog this article too and rub it in the face of people who buy here.

At 6/07/2006 11:59:00 AM , Blogger Athena said...

Yes, apparently the realtors are finding that people are backing out of buying once their brain starts kicking in. They want to put a stop to that ASAP. This is real estate. No thinking allowed.

Hey... the banks and realtors got a good gig going while it lasts...

They get fools to pay 2 and 3 times the going rent for the same houses... commit to fixing them up and investing more money, and HELOCing more money to add gadgets and cliches to the house, yet they will never own the house. They are merely paying the bank a premium for renting it from them and fixing it up so it will "maintain" its value.

bwahahahahaha... talk about selling the mold off a shower curtain. ;-)

They have even gotten these fools to believe they are the new generation who aren't interested in owning a home, they don't aspire to mortgage burning parties.

It is not about owning a home anymore, it is about being a mortgaged to the hilt, in debt up to their eyeballs, run of the mill, I can't think for myself, or do math kind of bozo.

Let the financial Darwin games begin.


At 6/07/2006 07:02:00 PM , Anonymous tom stone said...

gosh you really think the idea of relating price to value will catch on?as far as the darwinian games they started at the end of last summer...the number of people i know who don't want to talk about real estate...or who started avoiding me recently is surprising.i'm not about to rub it in they will have a plenty hard enough time without that.interesting stuff on ben jones blog about appraisal fraud...large numbers of flat out forged appraisals in cook county illinois...which sounds like organized crime to me.

At 6/07/2006 07:13:00 PM , Blogger Athena said...

Isn't cook county the home town of organized crime? Would you expect it to get exposed anywhere else? It is rampant here too and we know it, but they need a poster child to set the example. Cook county is going to be the poster child ground zero.

Anyway, I have mentioned it a couple of times now that I have a friend, an appraiser who went to work for a bank. The bank has a standard operating procedure that they will cook the appraisal if it comes in and doesn't meet the objective of their preferred customer. They of course will take the original appraiser's name off the report and insert the boss' name... but still. This is so standard operating procedure that they aren't afraid to say it out loud as if that legitimizes it.

My cousin called me today too letting me know about his buddy who wants to sell his house for the mid to high 600k. Gave my cousin an economics lesson, though he didn't need it because he is in the construction industry and knows his way around a math equation or two... but it made me feel better to go through the numbers anyway with someone who not only was listening, but enjoying how right I was too!

I told him to tell his buddy that when he sells it for a price that will make the 30 yr. fixed loan payment roughly in the ballpark of what he could get for rent for the place then we will talk.

apparently his buddy is trying to do the word of mouth sale with the house, and is saying that if he has to use an agent he is going to price it in the 700k region. LOL... good luck to you buddy. ;-)

I also have a confession to make... over the past weekend I spent it in the company of one of the most delightful real estate agents I have ever met. There were a whole bunch of us at dinner one night talking about the state of Sonoma real estate, and when she piped in it was unanimous, we all wanted to know if she could come and work here!!! She is SO smart and honest and has GREAT math skills!

She said no she would not, and she is moving out of state and said she would not sell real estate there eitehr. She said she doesn't believe you can be worth your body salt to sell real estate unless you really understand a local area and have your finger on the pulse of the economy and realistic growth expectations. She said it takes a lot more than looking at a demographics report and peddling houses like walmart widgets.

Needless to say... we loved her.

At 6/08/2006 12:51:00 PM , Anonymous tom stone said...

i know a real estate broker like that in sebastopol,not the top producer in the office by any means,but knows the area like the back of his hand and dead far as crappy houses i believe the stuff built in california the last few years will gain a reputation similar to the harley davidson's built under AMF.and i'll bet the builders are cutting every corner they can to get projects completed and sold before the hammer drops...lots of lawsuits against bankrupt builders coming...not to mention realtors,loan officers,and appraisers.a good time to be a real estate attorney.

At 6/08/2006 01:24:00 PM , Blogger peterbob said...

"And when all else fails, try a price adjustment! There is little that is sacrosanct about today's prices - and price really does overcome all objections."

Why not try a price adjustment first? That would work with me.

At 6/08/2006 05:14:00 PM , Blogger marin_explorer said...

Cook county is going to be the poster child ground zero.

There could also be a few local/CA areas with surprising meltdowns, such as parts of our central valley. Looking at it another way, the extreme runup of some "unbustable" areas may be the linchpin to confidence in California's market. If these areas fall, there won't be any psychology left to support the less "prime" towns. San Francisco/peninsula is certainly one example. Establish weakness in one “desireable” market, and the whole argument evaporates.

(I haven't been able to post to Blogger for hours; glad it's back online)

At 6/08/2006 07:16:00 PM , Blogger Athena said...

yay! The posting is back... now let's see if I can post a new article. Haven't been able to post anything no news and no comments for some time now. It's free, but really frustrating some days.

Reskeptic- I think your scenario is how it's gonna be. When one of the serious "its different here" areas fall... the dominoes will all start tumbling.

At 6/08/2006 08:01:00 PM , Anonymous tom stone said...

i think that when the pope sells an absolution,the price might be sacrosanct.....but real estate? so what areas in norcal are golden?los altos hills,tiburon,piedmont,sonoma,how about sebastopol with its 29% yoy decline in the median in april?can we reach a consensus?how about novato, the jewel of marin county? athena,the punch line is "one more and she'll have a goatee"


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