Sonoma Housing Hairball

... Not a pretty picture

Press Democrat
"The county's housing market has been falling back after an eight-year run of soaring sales and prices reached its peak in August 2005. The correction was expected, with Chris Thornberg, a principal with Beacon Economics in Los Angeles and formerly with the UCLA Anderson Forecast, and other economists saying it was overdue, but it has been quicker and stronger than many anticipated."

"The housing downturn already is causing job losses in construction and real estate and could depress consumer spending, increasing the chances for a recession."

"Home prices: Falling home prices will hit bottom early next year and remain flat into 2011."

"It was a bubble. And the bubble is popping. The real debate is whether this is going to be a soft or hard landing," Thornberg said.

"Many builders, brokers and lenders have become resigned to the housing slowdown, yet hope Thornberg was wrong when he predicted the market won't regain strength until 2011."

'"I think he was confirming what we have been watching. We've been there before. It's going to be a little longer than I would like to see," said Phil Trowbridge, a longtime home builder who noted sales have slowed at his Vintage Greens development in Windsor."

"Sonoma County home sales are down more than 27 percent so far this year. The median price has fallen 7.7 percent over the last year to $567,000 in September."

"Falling prices already have led to rising loan defaults for many more homeowners across Sonoma County and state. Others could feel the pinch when it comes to spending decisions because they feel less wealthy."

'"How consumers respond, that waits to be seen," Thornberg said. "This might all blow over. On the other hand, there is the potential for a true catastrophe."

One reason is Americans over the past 18 months have registered the lowest savings rate since the Great Depression. The gap between spending and disposable income has fallen from 7 to 8 percent in the early 1990s to negative levels today, Thornberg said.

"This is not a pretty picture," he said.

"Two forecasts - by Moody's Economy.com and UCLA - predict housing will remain weak for at least two more years and as long as five years. Prices should dip lower before leveling and then move little for several years, absent a recession and significant job losses in sectors other than housing."

"Still, what is going on in housing remains troubling, Thornberg said. The market's annual double-digit price increases the last several years drew buyers who figured the gains would never end, setting up a painful correction, he said."

"A home is a spectacular investment, but not because of its value," he said.

"Yet homeowners increasingly viewed homes as a piggy bank rather than a roof over their head that would provide modest gains over the long run, Thornberg said. Historically low interest rates largely drove the surge, making monthly mortgage payments less costly and allowing buyers to purchase more with their money even as prices went higher."

"Adding fuel to the housing sector were loans that further reduced costs for buying and refinancing homes. Lenders expanded offerings of these interest-only loans and option mortgages with even lower monthly payments that allowed buyers to qualify for larger loans."

"Thornberg described it as "funny money" because those monthly payments eventually go higher, and homeowners rely on rising property values to refinance into new loans or sell to pay off loans."