Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Tuesday, July 18, 2006

Going Down??!

They're finally getting around to what those of us who track the housing bubble sites have known for a long time now. San Diego,is in trouble.

Some are going as far as to declare all California will go the way of San Diego, one of the hottest U.S. housing markets in recent years, with large gains in home values soon to be undone, perhaps by a sharp correction.

Ooooh, a sharp correction. Such as a big fat interest rate nail to pop this bubble. They still use such terms as "some going so far" as though one were speculating about UFOs and not the reality of the RE market. Observing how things have gone up and down in cycles over the last several decades one would think they are merely toying with the idea of RE gravity.

I remember being urged by our economist friends' wife to jump into the condo pool in SD back in '04. A great investment fior ones' mad money. Personally I've never been much in favor of the concept of "mad money", or as they call it in Hollywod "F you money". Mad money should be no sum over 100 dollars, a cool purse, a cute pair of sandals (gotten on sale) not a condo down payment. Oh, but now I remember, people were getting condos back then for no money down and I/O loans, with neg am , stated income only and all that good junk. If one asks the experts what thy think about all this here's what they have to say:

"The conditions aren't there for a big rebound in prices or for a big drop," he said. "We would need a big drop in interest rates to get any significant movement on prices on the upside. We would need to see some significant job losses, a recession at the national level, to get a big drop in prices."

No mention of a rise in interest rates. They act as though that is not even a possibility. Everything is tied to jobs and not the toxic deals that so many have gotten themselves into.

Meanwhile, this article on timing the housing market
has some interesting reminders on past bubbles and crashes. Though why they see no connection between the hard landing of the early nineties, which they partially blame on the S&L bailout, and what's been going on in the lending industry in the last several years puzzles me. It would seem that we're dealing with very similar conditions, so why should be be talking soft now, hard back then?

Back at Toll Brothers and their ilk, homebuilder shares have dropped, which is attributed to the Fed "bombshell" of interest rates.

``If the Fed wanted to cool housing, they certainly succeeded,'' said Dan Poole, assistant director of equities research at a unit of National City Corp., holder of 382,000 shares of D.R. Horton, the second-largest homebuilder. ``It's like a bombshell went off in the housing industry.''


At 7/18/2006 01:41:00 PM , Blogger marin_explorer said...

We would need a big drop in interest rates to get any significant movement on prices on the upside. We would need to see some significant job losses, a recession at the national level, to get a big drop in prices."

Hmm...anyone see glaring holes in this assumption? As MV pointed out, a rise in rates is effectively a paycut, an erosion of home buying power. Does that have any bearing on price levels? What may have been a bearable house purchase amidst wild appreciation will look downright insane in a flat market. Where have all the buyers gone?

Not to mention--shouldn’t those psychological factors that pushed up the market have a detrimental effect on the downside? Lest we forget that mythical fork in the road, where the path of “ownership” leads to financial independence--and renting leads to a downward spiral of poverty and ruin. How ironic for many overleveraged California buyers, the opposite may soon be true?

At 7/18/2006 01:48:00 PM , Blogger marin_explorer said...

Here's a link to the mortgage reset map that is now absent from the article I cited above.

At 7/18/2006 02:38:00 PM , Anonymous tom stone said...

this bubble is done,no matter what the nar says or the fed does.the attitude has changed and people are hearing about losses incurred by friends,relatives and coworkers.santa rosa has lost all of last years appreciation,and more.the only question is how ugly and how drawn out it will be.

At 7/18/2006 03:32:00 PM , Blogger moonvalley said...

Thanks marin explorer! I am still flummoxed by my flipper pals who when questioned about the housing market crashing just smile cryptically and say, "we'll see"

At 7/18/2006 11:34:00 PM , Anonymous Anonymous said...

The only thing justifying the high prices was the rise in prices and anticipation of abundant equity. Once that stops, no matter how high the prices are, these houses values as assets will be useless and the prices will revert to the value a house has: as a place to live. Look for at least 50% haircut in So Cal.

At 7/19/2006 02:19:00 PM , Blogger Marinite said...

anon 11:34 -

Or you could look at it like economist Thornberg does -- the recent price gains over the last few years can be thought of as "taking demand away from the future". It may still be that house prices stay flat for, as he says, 5-6 years while fundamentals improve enough to support the current prices. If so, then sellers have to go 5-6 years without being able to make a sale (on average).

Yeah right, sure.

Personally I don't think that is what will happen. The "suicide" loans weakened the fundamentals needed to support prices. As these loans go away the necessary fundamentals won't recover enough in that 5-6 year time frame even if wages were to somehow double in the that time frame. 10-15 years, however, is another story.

Plus, prices are set at the margin so anyone who has to sell will or else default. Same diff on prices. That isn't to say that the mean and median prices still don't go up; they could be driven by the pricier houses which are being purchased by folks wealthy enough not to have to worry about a suicide loan or care what the interest rate is. But the market for the rest of us, that one will tank.

At 7/19/2006 03:10:00 PM , Anonymous tom stone said...

marinite,as far as the median,i agree with you and the charts in today's press democrat clearly show sales way down and the median way up,almost to peak prices.with the financing used in sonoma and marin i see no way that prices can stabilize,even with no more interest rate increases(which will come anyway when lenders start demanding a more appropriate risk premium)i have a hard money loan flier on my desk that is a 2/28 libor arm,starting at libor plus 6%,i/o for the first two cap is 18%.up to 70% ltv.there are still plenty of fools out there,however the screams will dissuade all but the most foolish to reconsider paying insane prices for crap,assuming they qualify for it.

At 7/19/2006 03:36:00 PM , Blogger Marinite said...

Imagine the following scenario:

Prices are totally unaffordable to everyone except the uber-wealthy. Also, there are no loan products that make buying anything worth living in affordable.

Q: Who will buy?
A: Only the wealthy.

Q: What will the wealthy buy?
A: Not that POS tract home. Not even that decent home on a hill. They will be buying the nice stuff for themselves. Would they buy a tract home as an investment? Maybe some but most won't if they are pessimistic on prices over the short to medium term which they should be.

Q: So what?
A: The $2mill*+ houses sell for asking or there abouts but sales are down. Everything under $2mill tanks. IOW, one segment of the market goes on as it has been and the other tanks. If you average over the county or even by city prices will look to be going up, but in the submarket us "not uber-wealthy" folks are interested in, prices may be way down.

That's my take anyway.
*arbitrary number for "really expensive but really nice".

At 7/20/2006 12:05:00 PM , Blogger moonvalley said...

I have a question that maybe some of you RE pros out there..(Tom Stone? ) can answer. Cruising around Zillow I was surprised to see that the house that we've been leasing for the last three months went down in value, 3.5k in the last week, and has lost 40k in value since March. It went from, about 800k down to 760k. Meanwhile, the neighbors house went up 9k last week. I started checking around all over the neighborhood, and all over town and found these weird changes in price. Our house is larger than the neighbors and newer, no one has done anything to either place, why the werid changes or is Zillow just strange?

At 7/20/2006 02:08:00 PM , Anonymous tom stone said...

MV,i have noticed the same phenomenon,and i think zillow is just strange,it is an automated valuation model...probably quite accurate when dealing with a large universe of more or less similar properties,but inherently inaccurate for any individual home,i don't know how they value,i suspect a $. per sq ft,by zip,adjusted for construction quality,age and home type,with maybe lot size thrown in.awfully hard to get a good model with all the variables.they do try and i find the aerial views and comps quite useful,but have noticed serious inaccuracies,like a two story home described as one story.

At 7/20/2006 04:34:00 PM , Blogger moonvalley said...

Tom, interesting. Our place is a lot newer than the neighbors, we're on 1/3 of an acre, (larger lot) quite puzzling. I did look up my flipper freinds house and seems that they paid more than they told us, I can understand why, also that it's gone down in value about 5k in the last week.


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