Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Wednesday, July 26, 2006

It's Just Going To Be Bad....

Really? I take my eye off the blog to tend to some problems I actually get paid to solve and look what makes the national headlines... wow... what a shock... ;-)

"After another monthly dip in June, sales of previously owned homes have fallen in all four major regions of the United States from a year ago, with nationwide sales volume down 9 percent, according to a report released Tuesday by the National Association of Realtors."

"These trends are rippling into the broader economy. Home builders, among the most impressive contributors to gross domestic product in recent years, are scaling back their plans. And millions of consumers face indirect effects: With interest rates rising even as home prices stall, fewer people can borrow on home equity as a source of free cash. Many others – those with adjustable-rate loans – are now being hit by a jump in their mortgage payments."

"The question is how far housing's slowdown will go, and how fast. So far, the impact on the overall economy has been, in the words of Federal Reserve Chairman Ben Bernanke, "orderly."
Economists generally expect that it will remain that way, although some high- flying real estate markets may face a harder fall."

'"We don't think it's going to be a disaster. It's just going to be bad," says David Wyss, chief economist at Standard & Poor's in New York."

"What this housing downturn could do is slow the pace of economic growth significantly.
Economists at Merrill Lynch, for example, reckon that the dive in homebuilding alone could subtract a percentage point from overall gross domestic product in the third quarter, tugging GDP growth down to perhaps 2.5 percent, annualized, for that quarter."

"And recession is a real possibility, in the view of Merrill Lynch's David Rosenberg. After the past 10 peaks in new-home starts by builders, an economy-wide slump has followed seven times. Housing starts, like home sales, peaked last summer."

Now that gusher is fizzling out.

'"Households are beginning to feel the full impact of higher borrowing costs, a softening housing market, and high gasoline prices," Nariman Behravesh, chief economist at the consulting firm Global Insight in Lexington, Mass., wrote in a report this month."

"If a construction slowdown represents a cut of nearly 1 percent from GDP growth, the impact from a slowdown in home-equity extraction could be almost as large, some economists say. Fixed-rate mortgage rates have jumped more than a full percentage point during the past year, as the threat of inflation has loomed larger and the Federal Reserve has raised the short-term interest rates it sets."

"The higher the Fed raises interest rates, the worse the problem gets," says Mr. Wyss at Standard & Poor's. "The rising level of home prices has been a big boost for consumers."

"The full extent of the housing slowdown will unfold slowly, and in ways that are often unique to individual markets, economists say."

"Often a down cycle involves two or three years of flat or falling prices, followed by a slow recovery."

"Nationwide, the inventory of homes for sale is up 39 percent – leaving a 7-month supply of homes on the market."


At 7/27/2006 08:41:00 AM , Blogger Lisa said...

So much of the boom was sheer psychology. As more & more markets go flat or dip YOY, I think fewer & fewer people will be interested in paying these prices. Why carry a gigantic mortgage for no price appreciation? What's the point? With no or little upside, a house will look like an overpriced money drain.

At 7/27/2006 10:58:00 AM , Blogger Marinite said...

lisa -

Sure. But the real questions are when will sellers capitulate en mass and by how much? I think it will take a full year for sellers to finally let go of their sense of entitlement to 2005 prices. Once the price discounting starts rolling along it should feed on itself until we hit bottom.

At 7/27/2006 11:04:00 AM , Blogger Athena said...

Hi Lisa,

Thanks for posting! You are so right. I had this conversation with a friend just before starting this blog... as he thought buying an $800k bungalow on the East Side was a can't lose proposition and he only wished he could get into that game... WTF? was my response.

I asked... ok, so let's assume we go do something like that, who is going to buy the place from us for more than that when it isn't actually really worth that? It didn't make good investment sense to me, and seemed like something you would only do when you have so much money you need to begin wiping your butt with it to get rid of it.

He shrugged and said this is the new Sausalito... and that real estate always goes up, and better get in to the best place you can find for as much as you can afford before you are completely priced out.

I am still waiting for the right moment to ask him: "ya, who's your daddy now?"

I think Marinite is right that it will take another year of declining sales and interest rates squeezing people tight. I think when they first go up they wince... but it will take some time before their juggling act tires them out and they realize the jig is up. Maybe this time next year I can ask the magic question... maybe take pics of the moment and post them?

The price appreciations in Sonoma have been completely psychological and I am seeing new listings in my email every single day. Of course everyone thinks they have a half a million dollar house... but LOL... who wants to pay half a million dollars for the privilege of living in the Boyes Springs chit hole houses?

I think the slide to the bottom will be a case study for a psychology class too... only with unfortunate financial outcomes for many.

Will be posting some new stats, and hopefully reviving the price reduced list for some kicks and laughs. ;-)

At 7/27/2006 07:34:00 PM , Anonymous Anonymous said...

When these Flying Pigs look down, there's going to be a great Big SPLAT and somebody "Makin Bacon" .

At 7/27/2006 10:45:00 PM , Anonymous pmd said...

Mike Myers' Scottish voice:
Oooh Anon, ye make that sound so sex-xy...



At 7/27/2006 11:11:00 PM , Blogger moonvalley said...

so true. We were in the garden at deuce eating lunch the other day and there was loud conversation from the next table over . The story of two FB'ers who bought at the top, fixed the dump up and now are stuck with it.O f course they've got some sort of toxic loan they're dealing with also. I also found out the the female of the pair is addicted to furniture and they have a vehicle which gets about 5 miles a gallon. All this info while eavesdropping. We had all we could do to not chocke on our lunch.

At 7/27/2006 11:33:00 PM , Blogger Athena said...

OMG!!! That is priceless! are you around this weekend? We will be home until Sunday night. Give me a jingle lets go eavesdrop and gossip!

At 7/28/2006 01:17:00 AM , Blogger moonvalley said...

heh heh...ooooooo you're bad! but I'm not any better shoot me an e-mail.

At 7/28/2006 03:21:00 PM , Anonymous tom stone said...

the inventory in the sebastopol area roughly doubled since july month after the first month of mortgage resets.yesterday three people told me real estate was dead in sonoma county,none in the biz,two also mentioned the sudden proliferation of for sale has been about 6 weeks since anyone has called me a fool for describing this market as a bubble.a nice change.

At 7/28/2006 07:02:00 PM , Blogger Lisa said...

Hello Marinite: I don't know that sellers have to capitulate en mass for the market to go down. All it takes is a neighborhood house here & there who need to sell, and voila, you have lower comps which will force the hands of other sellers. The market didn't go up overnight, and it won't go down overnight. At some point, the MSM will smell blood and will stop sugar coating the train wreck.

I watched friends lose money in the last cycle (early '90s), no reason to think it won't happen again.


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