Learning to Market in a Down Market

Recently received two glossy auction publications in the mail from Hudson & Marshall, one for SoCal and one for NorCal. Inside cover reads...."Don't be intimidated by the auction process!"

Background: Over the summer, hubby and I thought we would attend one of the auctions. After we registered (which is how we ended up on H&Ms mailing list) online we started to read more of the details on the auction process, rules, and associated fees. We also tried to browse some of the many listings, but there weren't many pictures and not much info to accompany the listings. Once we realized what a sham the whole thing was, we decided it wasn't worth the trip or waking up the kids (who were napping).

Based on the mailings, it appears they are stepping up their service to generate more interest. The nice glossy is a welcome change from the frustrating experience I had earlier. I believe they were previously operating under the (mistaken) impression impression that$10k - $30k off market would be enough to generate crowds of bidders. We all know how well that worked out for them based on Agent Bubble's diligent follow up (at last report, less than half the properties actually closed escrow).

Again, inside cover reads, "Over 90% of the bids were accepted the day of the auction." I call BS!

The Sacramento auction set for Nov 18th. If anyone attends, please give post a report.

Stop the Presses - Recession Ahead

Typically I am an optimist. However, over the past 3 months, I have become increasingly anxious about a major recession/depression. I have come to believe that record oil prices and the bursting of the housing bubble are the prelude to something bigger.

On the other hand, I have been confounded by the rise in the stock market as of late. Unfortunately, the much needed corrections that have occurred over the last year have been short lived.

Yesterday, my fears became much more real and localized. My uncle, who has been living in Sacramento for over 18 years, is a printer. I consider printing to be the local equivalent to cardboard boxes. Its a leading indicator of how the economy is doing. When times are good, menus, brochures, mailings etc. are being printed. He was even laid off in the early '90s, so my theory holds up pretty well. He was asked not to come into work on Monday because they didn't have any new jobs lined up. He has been at this company for over 6.5 years and can't really remember another time when this has occurred.

I am not normally one to prognosticate on things like this. But I think this Goldilocks economy is going to take a turn for the worse.

Renting is Even Cheaper than You Think

Home prices are dropping, and if you are anxious like me, you might be starting to compare your monthly payment (adjusted for taxes) to your rent. But there is a little twist that many don't consider.

If you buy a house, you will no longer be making interest on your down payment. (I'm making a rather brazen assumption that have to have a sizable down payment to qualify for a loan.) So when I compare my potential adjusted monthly payment (including any HOA and Mello-Roos etc) to my rent, I use an interest adjusted rent (Rent minus the $250 or so in interest that I make off our down payment each month). To some degree, you could say I am factoring in the opportunity cost of buying a house.

When you make this downward adjustment in your rent (13% reduction in my case).....you will realize that we are nowhere near where we need to be for this market to recover. Compared to purchasing, renting is a bargain. When you adjust your rent for interest, its even more of a bargain than you realized!

Speaking of downpayments earning interest. We are looking into a higher yielding investment to stash our $$ while we wait this out. Being optimistic, we originally put it into a high yield savings hoping to purchase sometime this year. Seeing as how we are still a ways off, we figured we should do more with our down payment.

Anyone have suggestions? I don't know much about the dizzying array of financial products beyond the general stuff.

If you build it - will they come?

Late last week on Lander's blog, a topic came up that I had been planning a post on. Earlier in the week, I had taken my son to the pediatricians office located on Golden Foothill Parkway, just South of 50 and White Rock. I counted at least 14 different signs between the office space/warehouse for lease, buildings for sale and commercial property for sale.

When I first moved here, I had assumed it was newly developed (thus explaining the high vacancy rates). One year later, the picture doesn't seem to have changed much. In fact I think there are more signs up now.

On the retail side, in the last month I have now seen two businesses close their doors in the new Town Center just up the street from the commercial development. To make matters worse they are building more retail by the new Target, and hadn't even filled up the existing retail space in the rest of the Town Center. Not to mention the large retail development going up across the street. One exit up at Bidwell they are putting in a new mall (okay, so I will admit, it will be nice not to drive 30-40 minutes to get to a nice mall), and what looks to be additional retail. And of course there is the partially vacant shopping center off Fransisco in EDH with the new Safeway.

I don't see how the local demographics can support all this retail. I have got to assume that these projects were planned years ago, cause it just doesn't seem to make sense now. I also have to assume that they didn't realize that everyone and their brother were also planning to build. Especially since there doesn't seem to be anyone taking up residency in the existing retail or commercial properties. Although I do believe the mall tenants have already been signed on.

Short rant - I don't like the new trend where these planned developments put all the retail space right up next to the freeway entrance, and all the housing after that. It creates lots of unnecessary congestion as the homeowners and the shoppers get intermingled. I saw a map of the proposed development for Folsom South of 50, and it follows this exact layout. Sigh.

Folsom Mall Layout....see below. If you want the .pdf you can e-mail me. Its much easier to read the store names.

The Weekly Screen Scrape - Re Acceleration

So looks like the downward price trend is picking up steam this week, the average price per square foot of homes for sale in my criteria dropped by $2 from last week. Inventory is holding and contract activity increased a hair, but is still below the average for the stats I have collected.

Back in May I did some premature calculations on when I would feel comfortable buying given the current trend in price per square foot. Shortly after that, I got incredibly discouraged as I saw the price per square foot creep up.

However we have been on another down slope for over 2 months. Nonetheless, at its current rate, it would be almost a year before the average dropped to $180 a square foot....sigh.

Inequality Increases

Slightly off topic post.....

My last post reminded me of an article I read in the WSJ a couple weeks back. As those who read regularly have already observed, I tend to be a bleeding heart. I see this situation as a failing of both our market economy and of our democratic political system. In fact, I find it downright disgusting.

Kudos to the Journal for covering this. Their readers are in the top income brackets and need to be exposed to these figures. How can it be that so few have so much, while so many have so little in this "land of opportunity"? Our middle class society doesn't seem to have much of a middle class anymore.

Excerpt below:

"The richest Americans' share of national income has hit a postwar record, surpassing the highs reached in the 1990s bull market, and underlining the divergence of economic fortunes blamed for fueling anxiety among American workers.
The wealthiest 1% of Americans earned 21.2% of all income in 2005, according to new data from the Internal Revenue Service. That is up sharply from 19% in 2004, and surpasses the previous high of 20.8% set in 2000, at the peak of the previous bull market in stocks. The bottom 50% earned 12.8% of all income, down from 13.4% in 2004 and a bit less than their 13% share in 2000."

Dazed and Confused

Skimmed an article online regarding yesterday's report on existing home sales. What really strikes me, is the shock that these "experts" display with regard to how quickly and strongly the bubble has burst. How can they be so surprised about this? Are they really being genuine, or were they pushing their product the way RE Agents and mortgage brokers are?

Year after year people were astonished at how the market was going like gangbusters....was there no rigorous analysis as to what was driving this unprecedented growth? Stating it was fueled by low interest rates is not rigorous analysis.....and is akin to blaming the subsequent correction on subprime....its not the whole story.

In what industry have we ever seen 50%-100% appreciation in 5-7 years (okay so there might be a few....like perhaps oil..but I haven't checked the charts) without some type of correction?

As a percentage of a family's budget, housing tends to be the biggest monthly expense. If oil goes up by 50%, yes, it will affect consumption to some degree, but as a percentage of our net income, its still small potatoes compared to housing (unless you are one of the crazy live-in-Sac but commute-to-Bay-Area folks).

In other words, there really is a natural cap on the price of housing, and its directly related to income. Other items can be substituted to a degree. Buy things at Wal-Mart as opposed to Target or Macys. And the mix of items a family buys can change in response to price. Spend more on gas, and less on movies.

But housing....its not something you can change your consumption of on a day to day basis (once you are past your 20s). How did the "experts" miss this chapter in their economics courses?

Sacramento vs. Bay Area

Okay, things are a little slow here, so I thought I would stir up some controversy. I know there are quite a few folks out there who merely "put up" with Sacramento. They consider it to be a low-brow cow town. However we are here because we prefer it. In theory I could move to the Bay Area, since I work out of the house...but I can't really think of any compelling reason to do so. Aside from living in SF proper (which is not a place I want to raise kids), the rest of the Bay Area seems like a big sprawling suburb to me, especially East Bay. What am I missing?

So lets examine the quality of life evidence....*

Housing - Sacramento much less expensive
Traffic - Sacramento not as bad (although I can't say for sure). Both cities have clean and efficient public transit system (hubby takes the light rail to work).
Weather - Hard to say, while Sac has the heat, SF has the fog.
Air Quality - Most likely the Bay Area.
Economy - SF is more dynamic and diversified, while Sacramento is more stable but growing.
Public Schools - Really hard to generalize this one.
Cultural Events - Bay Area (In all honesty, this no longer enters into my decision making since I can't take my kids to these events).
Parks and Recreation - Not sure, but Sac has a lot to offer in this department.
Downtown District - Both cities have unique downtown districts. So its hard to compare.
Restaurants - Bay Area has more to offer. But once again, I'm not at that point in my life where we get to take advantage of what is available. Sac has some nice places to eat, and considering how often we go out (date night is once a month) the more limited selection is not an issue.

*Non of this applies if you are young and single. In that case, the city (SF) is where you want to be.

Negotiating Tactics

Catching up on my WSJ reading I came across an article from September 26th on housing. The article states that Lennar's average home price was down 6%, to an average of $296,000, and the average discount/incentive was up to $46,000 (not exactly sure where they got these numbers).

Why is this important?

If you are looking at a new home, not a bad idea to do some homework to get these figures for your builder. If we decide to purchase with Lennar (they are a front runner right now if we buy new), we can use this information for negotiating purposes.

For instance, if the list price of a home is $459,000, then using the same percentage discount/incentive off their average home price (15.5% ) brings us down to$388,000 or so. Its their data, so it won't be as easy to refute. Of course they will still backpedal and make excuses as to why they can't do it...but its a very reasoned approach from which to start negotiating.

Truthfully, its probably a bit more realistic than the pick-your-year home price plus inflation, that us affordability nuts like to use.

Anyways..feel free to share negotiating tactics, as affordable housing is nearing the horizon.

Sacramento September Month's Inventory by Zip

Slowly all the zips succumb to the market correction. Only a limited number of holdouts below the 6 month mark now (this mark generally signifies a balance between buyer and seller).

As the for sale inventory persists and actual sales plummet (even beyond the normal seasonal drop)....the month's inventory take on some ridiculously high values in some zips. As a whole, the region is at 12.2 months inventory.

This "buying power" is a very welcome change compared to when hubby and I went shopping for our first house back in the early spring of 2001.

Separately, I'm a bit frustrated with the media as there seems to be a lack of sympathy (and even some hostility) towards prudent buyers who are priced out of the market. Seems all the sympathy is directed towards sellers (or in most cases listers). The coverage is very one sided.



As usual, the sales stats are from DataQuick posted by the SacBee each month. The inventory is gathered by zip code from ZipRealty each month for single family homes.

Folsom and El Dorado Hills September 2007 Data from DataQuick

Had to double check the data to make sure the numbers were correct. My my, things are certainly starting to pick up downward momentum.

Separately, but related.....I went back and talked specifics with Lennar (Blackstone development). Very tempting. Around $180 a square foot, plus solar, for a new home that really meets all our needs (except its a 2 story and we would prefer one...but other than that the layout has all we want). Only issue is the lot size and placement....a little too close together, but hard to tell cause they don't have much built. Its also an excuse to place the decision on hold for now. At least till spring, when they have more homes up and we have a better idea how long this market is going to slide.

In the mean time, we have joined a gym, so now we can go work out instead of cruising neighborhoods and open houses on the weekends. Let's hope the distraction works.

The Weekly Screen Scrape - Trolling

Not much to report on the weekly screen scrape. Inventory appears to be holding, and a small increase in contract activity.

Hard to believe our townhouse in D.C. was sold one year ago this Friday. Speaking of which, I did the screen scrape a day early because I go in for LASIK tomorrow. Paying off our massive student loans and my LASIK surgery were the two earmarks for our house proceeds...the rest has gone to the down payment fund. So far we have been very good about keeping to that plan. I find it somewhat ironic that I will now be able to see clearly thanks to the housing bubble.

Almost forgot to mention, I'm a bit burnt out from work travel, so I trolled the MLS today. Neighborhoods I never would have looked in previously, because they were way out of our range, are now coming within reach. This is very encouraging.

What do Pregnancy and the Real Estate Bubble have in Common?

....both tend to have better outcomes the longer you wait.

For he record, I think difficulty with waiting is a personality quirk of mine.

For example, I had the same anxiousness with my first pregnancy. I had to wait 9 month after we decided we wanted to have a baby for it to actually arrive. Mentally I knew the longer the baby gestated, the better. Of course I didn't want the baby to come early. I knew waiting was the best option....but it doesn't make the wait any easier (not to mention the whole pregnancy discomfort thing). Fortunately I come from a very fertile family, so we didn't have to go through the initial agony each month of finding out we weren't pregnant. I truly sympathize with my many friends who have had these difficulties.

I tend to be a very action oriented person, and also a planner.....so when I make a decision to do something life changing, like have a kid or buy a house, I want to take action right away.

But I have learned to cope with my quirks. On the kid front, with the second we "started" months before we were actually "ready." Then by the time I was actually "ready" for my second, the wait only ended up being 2 or so months.

In a somewhat similar fashion, that's how this blog was born.....to make my wait for reasonably affordable housing more bearable, and of course take comfort from the company of others in the same situation.

Hopefully the Bee will post September sales soon! The wait is killing me =)

Mental Note to Self

Nothing like a nice long plane ride to get me back to a rational state of mind (currently blogging from Kansas).

New home shopping is a lot like window shopping.....all the products are displayed so nicely, tempting you to buy.....but then you get it home, and there it sits....all by itself, without the rest of the display...and the magic that you saw and thought you purchased quickly fades....you don't use the product near as much as you thought you would.....and start to realize the justifications you used to purchase it aren't really panning out.

Mental reminder to self.....no purchasing till we know more details on hubby's next contract (in Spring).

I need a hobby....waiting makes for a really lame obsession.

A Family Tree of Renters

Recent events made me realize I have very few immediate family members who actually own a house in California. Both my husband's and my family are long time Californians (3 or so generations).

So here goes...

My Side -
Grandpa - Rents (a renter ever since I can remember)
Mom - Rents (sold in fall of 2006, not sure if she plans to buy anytime soon)
Dad - Moved to Mexico to retire since CA was too expensive (previously owned in Stockton)
*Brother - Purchased a couple years ago in Orange County.
Uncle living in Sac - Rents (but recently moved in with girlfriend who owns)

Hubby's Side
Parents - Rent (owned many years ago)
Brother-in-Law & family - Renting (never owned)
*Grandma - Owns

So this is around a 25% ownership rate in my close family. Nowhere near the national average. Hopefully the market correction will allow most of them to be owners.....as I know many of them would like to be (especially my in-laws)....but they were also smart enough not to buy into the get in way over our heads now or be left out forever hype.

Lead me not.....

......unto temptation. For I am weak and my patience is not indefinite.

We just looked at a new house by a very reputable builder today.....on almost a quarter acre lot in EDH, that is priced at around $187 a square foot. If we use their lender we get another $10,000 towards closing.

Looking at my screen scrape numbers, $187 puts them in the bottom 15% of over 100 listings. Folsom and EDH Prices would have to drop another 13% to make this the average price (and I do think they will drop at least that). So if average prices drop another 20% that would make our this house approximately 7% above the average price....for a new home. Okay, okay.....I am seriously justifying....

On the other hand, looking at the HOA, Mello-Roos and the fully loaded payments, its way over our rent. I could handle $500 a month over rent...but this is averaging $1000 over.

Sigh...temptation....we may go back later and look at some hard numbers....

Inventory Changes by Zip Code

Its a rather mixed bag this month in terms of inventory changes. Still seeing increases in some zips (ranked from high to low this month). So its not necessarily all downhill from here.

The Weekly Screen Scrape - Milestones

We have now reached a new low in listing price average (per square foot). Since March when I started keeping track of general stats on my weekly screen scrape of Folsom and El Dorado Hills houses that meet our criteria....the average price per square foot has dropped almost 5% and the number of listings, not pending, in my criteria has more than doubled.

More choices, lower prices......so far its definitely been worth the wait.

Comp Provider vs. Knife Catcher

I have a new term for what some in the HB world call 'knife catchers." My term is "comp providers."

If no one buys houses, then we don't get falling comps. Without falling comps, sellers price their houses based on unrealistic and out of date comps. With poorly prices houses, we don't get any sales. So the only way out of the Catch-22 is for someone to purchase, and bring the comps down.

As one commenter has observed....there actually are some 'good buys' out due to highly negotiable sellers. In other words, there are some folks purchasing who have done their research and used it to negotiate reasonable contracts.

And I want to thank them.....cause they are providing comps for the rest of us who are still sitting on the fence.

WSJ Analysis of Mortgage Data

As I have mentioned elsewhere, I have grown to love the WSJ's excellent reporting and analysis . Today is a shining example of why I am an avid reader. They have a front page analysis on subprime and high rate loans. They go into lots of data, and the website has even more interactive features.

Unlike many new outlets, the WSJ doesn't rely solely on anecdotal quotes and NAR provided data (although even they have been guilty of this at times).

Their independent analysis confirms what I suspected upon moving to Sacramento.....that it wasn't just subprime borrowers who are in trouble. Mortgage related woes are affecting affluent families that used high rate loans to get into houses and neighborhoods they couldn't qualify for under conventional financing.

Based on their analysis of when, and in what quantity, these loans were made....they suggest "that the pain could last through next year and beyond, especially if housing prices remain sluggish."

Dealing with Uncertainty

The WSJ had an article yesterday "Nothing can kill drive and inspiration like a long wait." While the point the author was making was rather interesting...the examples were poorly done. Luckily I kept reading and found some very interesting tidbits of research which I think apply nicely to those of us waiting out the housing cycle. In fact, I think it may partially explain some of the "irrational" behavior we see. I know there are times I get so tired of waiting, I am ready to buy a house...any house....but eventually my rationality returns when I compare my potential PITI to my rent.

"The torment of waiting arises partly from an uncertainty that seems to gather over time."

"Research shows that waiting for uncertain outcomes can be more uncomfortable than adjusting to the worst of them...."

"Waiting drives some of us to make dumb decisions. In a study conducted by Gregory Berns, an associate professor of psychiatry and behavioral sciences at Emory University, respondents were given an option of receiving an electric shock now or a lesser shock after waiting. Roughly a third opted for more voltage sooner."

The future of housing in housing futures?

Really interesting article buried in last Thursday's WSJ on page D6. It discussed how housing futures are now being traded on the Chicago Mercantile Exchange. According to recent contract trading, analysis indicates that we can expect an average 10% drop in home prices through Nov 2011. Trading is market specific, and includes all census bureau MSAs....unfortunately they don't show Sacramento's projection in their graphic. Apparently this wasn't really news until recent changes made the S&P/Case Shiller based contract market applicable up to 60 months into the future.

Separately the same article also showed Sacramento inventory dropping by 0.4% while the 18 metro areas tracked rose by 1.2% compared to last month. They also noted that inventories were up 18% from a year earlier in the 17 metro area where they had comparable data.

Commentary: The timing of this article was incredible...I had just been thinking how interesting it would be to apply this technique to housing. I know they apply it to many things, including election outcomes. And it is becoming well known for its accuracy above and beyond the experts. After all people are betting money on their positions.

Inventory persistence (as I will call it from now on) looks to be occurring across the nation as bank and distressed properties stay on the market with no hope of finding buyers. I'm no real estate expert, but I imagine that previously sales activity would whittled down the inventory in fall and winter at a faster rate than new listings....which accounted for the decline in inventory. But with few sales, and more distressed listings being added, that relationship does not appear to be holding. This party just keeps getting more interesting!

Each day the WSJ ranks its articles based on most e-mailed and viewed online....guess which article ranked at the top on Friday!! Why they bury this stuff on page D6 is beyond me. Its important and interesting stuff, especially since everyone and their brother seems to blame their woes on housing these days.

The Weekly Screen Scrape - Back Down

After 3 months, we are finally back down to an average of $215 per square foot for the homes I am tracking that are for sale. I had seen some nice declining trends in late spring, but then all of a sudden in the summer, the average started climbing again.

In general, the homes that are pending sale in my criteria (in Folsom and EDH) have a lower average list price per square foot. It seems, the few buyers that are out there are looking for bargains. Speaking of buyers, contract activity it is still really low.

My total listings did finally drop this week, as end of the month expirations and escrow closings kicked in. But I imagine it will pick back up as more homes drop their prices below my price cap. I have been seeing quite a few meaningful price drops the last month or so. Of course there will always be the annoying $1,000 to $2,000 drops, but those are now the minority.

September 2007 MelissaData for Folsom and El Dorado Hills

For the life of me I can't figure out what the heck is going on with the EDH data. Their averages are all over the place, but still moving upwards even thought sales have tanked. Only explanation I have is that the mix of homes has changed....with new, more expensive homes, influencing the averages.

On the other hand, Folsom is acting as a perfect poster child of a market correction (i.e. fewer sales brings down prices as sellers have to compete for buyers).

Is it just me?

Don't know about the rest of you Sac housing fanatics, but my obsession has slowly evolved into a mere daily/weekly task. My passion started to wane as the credit crunch and gravity of housing woes began to permeate the national consciousness. Once NAR acknowledged that housing was not going to recover till 2008 (and even then their estimates are always optimistic), the fun and excitement of countering the MSM dissipated. In other words the spark has been lost now that everyone acknowledges that housing is in for a major correction.

I had to laugh out loud last week when I read the first sentence of a WSJ article stating that the lackluster housing performance has ended up being worse than even the most bearish had predicted. I’m no paid expert, but it didn’t take more than some basic economics to know housing was in for a BIG correction. Yeah, it felt a little uncomfortable to try and justify my opinion in the face of what industry experts thought, but it was rather enticing at the same time. Now that we all agree….it has become kinda boring.

Of course I still love a good deal, so I continue to impatiently wait out the market correction.

October Good Buys

Looks like we picked up a bit of momentum last month (thanks to Cymst). Hoping we will make it to at least 5 "good buys" this month. I will have to rely on others, as I have been trying to curb my MLS habit as of late (since we are in our lease for another six months).

The "good buys" section tends to generate a respectable number of hits each day.....so listings posted later in the month will still be viewed.