Friday, February 29, 2008

If Every Day were a Leap Day

Thought I would take advantage of today, a day that only comes once every four years, to discuss the effect of scarcity. As any armchair economist knows, the more unique or special something is, the more it is valued. Conversely, the more common, abundant or replaceable something is, the less it tends to be valued.

Back in January, the WSJ had an article about how builders are reducing the choices available to new home buyers as a way to cut their costs. Apparently builders have finally figured out, the more you build to suit your buyer, the more your operating costs go up (or perhaps they just didn’t care during the boom times).

A perfect example of this trend can be seen at Lennar’s Blackstone El Dorado development. There, all the homes come with standard upgrades. The only customization allowed is in the flooring. This lack of choice was very surprising to us as buyers, since this is a rather high end development.

It also seems somewhat counterintuitive to me. As buyers have more to choose from these days, they are likely to be more discerning and want something suited to their tastes (as opposed to the time, when buyers were just grateful to get on the list to purchase a new home). I guess that’s why many builders are offering so many incentives, to differentiate themselves. However Lennar has built themselves into a corner regarding Blackstone (pun intended =). They already include all the trendy upgrades, so there isn’t much else they can do to tempt prospective buyers. I believe this commoditization of homes (no matter how nice) will lead to some depreciation for the new owners, because when the development is completed, the re-sales will have to compete almost purely on price and lot size/location.

Many of the major builders use the same floor plans from one development to the next, so commoditization is already a big problem in the rest of Sacramento. There are just too many similar homes on the market (Elk Grove, Natomas, Anatolia, Serrano etc.). The main way to make your home stand out, price it below your competition!

This scarcity argument has been used by many to explain why East Sac and other locations around town have not lost as much value compared to locations like Elk Grove. East Sac homes are both unique in character, supply (they come on the market less frequently), as well as location (close to the city) so there should definitely be a price premium that comes with these home. Just how much is a subject of great controversy =)

Thursday, February 28, 2008

Breaking Even

So I did a quick calculation this morning to make myself feel less anxious. I am no math whiz so take this all with a grain of salt.

I assumed a $350,000 principle and then incremented the interest rate by 1/8 to get a payment schedule. I then took that payment schedule and assumed a fixed rate of 6.5% to get a corresponding principle.

This helped me arrive at a general relationship between interest rates and price drops. With my assumptions, for every 1/8 interest rates rise, you would need a 1.4-1.6% decrease in price to still break even.

To put it in easy to remember terms, for every 1% increase in rates, you need a corresponding 11-12% decrease in price to still break even (the relationship is close to linear, but not quite, for the interest rates I looked at).

Of course I would rather have a lower principle and higher interest rate, for all the reasons pointed out yesterday......but in the end, you still have to come up with the cash each month.

I'm sure there is some elegant interactive calculator for this type of analysis. If anyone knows of one, please let me know the URL so I can post it on the sidebar.

Wednesday, February 27, 2008

What a Fine Mess We are In

First off, I want mention that I consider a home a place to live, not an investment. But with that said, I still want to maximize my overall happiness and financial well being when purchasing a home.

My mom, who retires this month, sold her home in late 2006. She has become much more serious about getting back into the market lately, since her options for a reasonable return on her financial assets (i.e. cash from selling her home) have dwindled significantly with all the rate cuts.

While her situation is slightly different than mine, recent news about increased inflation risks also has me wondering if it might be better to purchase sooner than later, even though the housing market hasn’t reached bottom yet. I do think the Sacramento housing market will be one of the first to stabilize…..since it was also one of the first to crack. I also believe, with the recent acceleration in price drops, that we will see begin to see signs of stabilization sooner than some had predicted.

Much of my increased confusion comes from trying to weigh the uncertainty and risks involved on either side.

If inflation is going to strengthen to the point where it will overshadow the remaining reductions in the housing market, the time to buy is sooner, while rates are still relatively low (before the Fed raises rates to contain it).

If the economy cools, the credit crunch continues to deepen, and inflation is contained, it could cause the housing market to overcorrect, in which case it would be best to wait.

And of course, there is the dreaded third scenario, stagflation, which I have no idea how to handle.

It all seems so incredibly complex. I doubt many average buyers, like myself ,will be able to successfully navigate (after all, even the experts seem to be getting it wrong on a regular basis).

What I often wonder as of late, has always been this way, and I just wasn’t paying enough attention ……or are we really at a critical crossroad?

Still in the Running

As the month draws to a close, thought it would be entertaining to check in on everyone's RSVP guesses. We still have a month to go.

Currently the numbers stand at:

Inventory: 15,221
Duncan is looking like the favorite right now on inventory (Sacramentia is close numerically, but I don't think inventory has ever cratered in spring).

Median Price: $315,000
Cymst and I are out of the running on median price. And at the rate things are going, its anyones game. In 5 weeks, its fallen almost 10k!

In case you missed it, here are the details of the get together.

Tuesday, February 26, 2008

Getting Personal

There is a reason people involve agents in a transaction. One is for the expertise they provide, and another is to have an “arms-length” transaction between buyer and seller.

During escrow on our first home, we were on rather nice terms with the seller. It was great because she introduced us to some of the neighbors, and gave us a little insight into the home and neighborhood.

In the past, my husband has suggested skirting a seller’s agent and contacting the seller directly to make negotiating easier in some circumstances (this was also before we had an agent).

Last night it came to light that a mom I know, and called to get her thoughts on transaction, actually knows the owner of the home we made an offer on.

So my question is this, what are the pros and cons of talking directly to the seller of a home (in the different stages of the negotiations)?

In some situations I can see how it would actually help with negotiations (the agent representing the buyer of our D.C. home was a first class jerk and we came very close to killing the deal during the inspection process as a result). But in others I would imagine its best to go though an agent.

Sunday, February 24, 2008

Blog Admin - Comment Policy

Due to a recent uptick in "comment spam" as well as some less than charitable comments....anonymous comments will no longer be allowed.

Good Intentions with Unfortunate Results

Saturday night was Mother's Night Out for my mom's group. While I try not to bring up real estate, it always seems to come up. Last night seemed to mark a turning point. It was the first time I had heard a homeowner say they didn't expect the market to recover for over a year (it was actually the hostess who has a very lovely place they bought last year up in Shingle Springs). Even more surprising, no one in this conversation disagreed with her.

While some bubble bloggers might be filled with glee about this news, its quite the opposite for me.

Many of these moms in this group had bought homes in the last 5 years......not because they were looking to make a quick buck in the market, but because they wanted to settle down and raise their kids in a relatively safe neighborhood.

With two young children I am exposed to this particular demographic on a regular basis. For it is my generation and the one right below me that will pay a disproportionate price for all the irrational exuberance that occurred in the last 6 years (for example, my little brother is close to a negative equity situation down in Orange County.....they bought a home, were married and had a baby in the last 4 years).

While I am not the type of person to wish ill on others, I can't help but feel angry at those responsible for the fraud and speculation that fed this housing bubble. Many average families will be under a lot of financial stress, merely because their biological clocks were ticking at a very inopportune time. It all seems so unfair.

Friday, February 22, 2008

Do I Still Need the Approval of Others?

We put in our first bona fide offer last night, offering 20% down.

The agent is now asking for a preapproval letter.

I can see how preapproval was a “must have” during the boom, when multiple offers were rolling in, because it hedged sellers from wasting their time accepting offers that were not realistic.

But now that the RE heyday is over……and offers are few and far between (this home has been on the market well over 100 days), can a pre-approval really make a difference?

Our offer, which was about 15% below asking, if accepted, would mean a short sale. Now if they really don’t have any intention of accepting our offer, why the heck does the agent need a preapproval letter?

Personally I don’t like the idea of getting pre-approved with each offer because it means my credit will be checked (my old letter is from June of 2007). Each time my credit is checked, it means my score will take a hit. Given that this is likely to be a long process (finding a home someone is willing to sell at a price I am willing to offer), I don’t want to hit my credit each time I make an offer because it could bring down my credit score and eventually affect my rate when I really do go to apply for a loan. I don't want to provide a blanket amount either, cause then the seller will know how much wiggle room we have (our not so current letter is for 8% more than our offer).

The RE industry seems to be dominated by dogma, so much so, that no one really stops to question why its being done that way in the first place. Pre approval letters benefited sellers when they had the upper hand. But now that buyers have the upper hand, I think they should be able to dictate the terms.

Thursday, February 21, 2008

Without Rain...

There can be no rainbow.

I don't remember seeing rainbows when I lived in Sacramento near Sac State (and one of those years it flooded due to excessive rain).

There must be something particular to the foothills where I live.......because we regularly have the pleasure of big beautiful rainbows that arch across the entire sky.

Today, I was treated to one below when I went to get my mail.

Folsom and El Dorado Hills Historical Trends up to January 2008

Haven't posted the Folsom and El Dorado Hills data for a while. Below are the charts for both DataQuick and MelissaData. Notice the rather stark difference between the pricing trends in MelissaData and DataQuick. I believe this is due to the fact that MelissaData reports averages, and also includes new home sales, which tend to be more expensive.

For a nice write up on the pros and cons of different price indices at Calculated Risk. I agree with their explanation and think it applies to the real estate trends and statistics we have seen for El Dorado Hills and Folsom:

"The NAR, DataQuick and other reports use the median house price; they take all the recent sales, and find the median price. This can be distorted by the mix of homes sold. When the bubble first burst, the median price continued to rise because fewer lower end houses were sold (the low end portion of the market with subprime loans slowed first). Now with jumbos being limited, the high end sales volume has fallen, and the median price has fallen quickly."

I especially agree with some of the concluding remarks:

"However I believe prices will fall across the board, and that the subprime market was just the first segment to see price declines."

Wednesday, February 20, 2008

Does Bad Juju Scare You?

Let me preface this post by reminding everyone that I have a very active imagination (hence the love of conspiracy theories).

Last Sunday we looked at several homes. One of them, and REO on 5 acres in Shingle Springs, had a very odd room (labeled “photo room” in the breaker box). So of course my imagination got the better of me, and I got a little creeped out by the potential activities that took place there (out of earshot of even the closest neighbors). While the price was very good for the location and condition of the house…..I was a bit leary due to the potential bad vibes of the house.

This isn’t the first time bad vibes have made me rule out a home. Last spring we had driven by a house listed for sale on Tam O’Shanter in EDH, and I got the willies just driving by it. Something was amiss. Can’t say what it felt a bad way. And was certainly enough for me to cross it off my list (and it was a much shorter list back then).

Another mom I know was considering purchasing a home in Stonbriar a while back. Apparently a man had killed his wife there, but she was okay with it. Personally, I’m not sure I could live in a house where I knew something like that happened.

So for everyone who is purchasing a house to actually live in…..does bad juju influence your purchase decision? I am not sure if there is a price point at which I would consider a home with bad juju, assuming we planned to actually live there.

Monday, February 18, 2008

Sign of the Times

When I run the numbers on a specific house to see what offer price we can afford, I typically pull an current rate from In the past, when I have queried a 30yr fixed rate, conforming loan with no points for the Sacramento area, Bankrate returned several pages of loan products that met my criteria.

This evening, only 6 products came up! I had to double check my criteria to make sure I didn't hit some weird option on accident. But it was no fact other loan types had even fewer products.

The screws are seriously tightening......

One's Lot in Life

To put it in fashion terms, lot size seems to be the new black, now that the housing bust is in full bloom. During the boom, builders put increasingly larger houses on increasingly smaller lots, in order to squeeze more profit out of their land assets.

Now that the boom has ended, the truth comes out. No one really wanted these homes, at least not at current prices. They only sold, because it was all people could afford. If they had a choice, as buyers do now, they wouldn’t purchase a home with a lot so small and a house so tall, that no sun will shine between you and your neighbors except at midday.

Downtown living is different of course. There, small lots allow for walk-ability, and the houses, for the most part, are charming. In the suburbs, all the houses tend to look alike, and very few people walk or bike to the grocery store anymore (not including Davis). So if you are going to bother living in the burbs, why wouldn’t you want a larger lot?….isn’t that the point, to find more elbow room than you would in the city?

The trend is that people would rather have a large lot, and a less grandiose home, as opposed to the other way around. Of course we fall into this bucket, so perhaps it’s my personal bias interpreting comments made by others.

We checked out several homes this weekend, all with above average lot size. I didn’t really fall in love with any of them….but I am not sure how much longer I will be able to hold out.

Saturday, February 16, 2008

January/February Month's Inventory

Even though inventory has dropped due to seasonality, month's inventory remains rather high. The weighted average for the metro area zips tracked below is 10.3 months. The zips are ranked from high to low based on month's inventory. Very few zips remain under the 6 month mark now (below which is considered a seller's market). Even Folsom has edged up considerably, and now stands at over 9 month's inventory.

Low sales numbers appear to be driving data, however as many have noted, inventory is also unusually high for this time of year. I expect sales numbers to pick up next month due to rate driven activity.

I also expect that some of the more iron clad zips will start to deteriorate at a faster pace now (including the ones I watch, 95762, 95630) as demand is siphoned by off to other areas which have become more affordable in the last year or so.

SFH inventory was collected from Zip Realty, and January SFH sales are from DataQuick via the SacBee.

Friday, February 15, 2008

Prime CA Real Estate for $20 a Night

For those of you who love the great outdoors, this morning at 7am was the big moment. Its was the time when Yosemite campsites become available for reservation (in July). With 5 separate people all trying to get different sites in Lower Pines, only 2 of us succeeded. The sites were sold out within seconds.

This situation is a great example of a deliberate market failure. It is deliberate because the government does not charge a market clearing price on purpose. We as a nation choose not to charge market value for Yosemite campsites because we want to guarantee access to all Americans and Foreign Tourists. Thus there is a deluge of demand for a limited supply. So in this situation the government relies on a first come, first served system instead. Unfortunately there is a great deal of gaming that can occur in this situation, and it doesn't necessarily result in an equitable allocation. Of course I am grateful for this alternative allocation policy, as we at least have a shot at securing campsites this way.

This situation also has much in common with the one I often study, landing slots at busy airports, which are also allocated on a first come, first served aviation, when a resource is underpriced, the price is paid in time and not $$....hence all the delay as aircraft are forced to wait their turn.

Feb Inventory Update

Collected the monthly inventory by zip. Not much to report. A very slight increase for the metro area compared to January. But individual zips were all over the place.

While gathering the data noticed that EDH, even though up this month, has really dropped overall. Some have pointed this out in the comments as a sign of recovery......yet the month's inventory has remained relatively high due to low sales numbers which seems to cancel this effect out. Anyways, I haven't seen the drop reflected it in my personal searches because a much larger portion of the available inventory is now within my price range.

As far as Sacramento Metro asking price distributions.....I changed the graph so it is a bit more intuitive to look at. Now the area under the curve represents the percent of homes available in a given price range. So as the market returns to affordability, we should see the graph bulge out on the left hand side over time. I was rather surprised at how quickly this movement has taken place. In just one month there are very noticeable changes.

Thursday, February 14, 2008

Whoo hoo!!! $1,200!

Saw the President on the news signing that new thing that gives us $1,200, so Mrs. Paul and me are headed off to WalMart today to do some serious shopping! I know, I know, we won’t get those checks until later (Mrs. Paul said the same thing), but as I explained to her, between our fourteen credit cards, I’m sure we can find two or three that aren’t up to the limit, and we can just charge what we want now, and then use the $1,200 to pay the credit card company later. Duh!

For the life of me, I can’t understand how Mrs. Paul thinks. She said our three car garage is already filled with so much stuff we can’t even walk through it, let alone park a car in it, so she says we should just use the $1,200 to pay off some of our credit card debt and not buy anything else. So ... trying to explain it as simply as I could for her ... I told that is exactly what we are going to do when we get the money next summer .... use it to pay for the things that we buy today! But right now there are things that I need and I deserve and I want. (Anyway, we have to hurry and use what’s left of our credit card limits soon because I’m pretty sure the banks are going to cancel our credit cards as soon as they learn we haven’t made any payments on our house for nine months.)

Then she started talking this nonsense about using the money to help America’s economy and how if we shop at WalMart, we only help China’s economy. How much more American can it be to buy from WalMart, founded by the greatest American ever, Sam Walton? I'm not sure I convinced her completely because she just kept saying, “我可爱的傻老公,他什么时候能学聪明点啊?” whatever that means.

So anyway, that is our plan for today.

The only part I’m still trying to figure out is ... if its so great for the economy when the government gives us our $1,200 back, then how much better would the economy be if the government gave us all of our money back?

Wednesday, February 13, 2008

What's our Price Range?

I really admire buyers who have a firm answer to this question. For us there is a lot of wiggle room and justifying that goes on depending on the house we are considering. So when new home sales folks ask what our price range is.....I really want to answer "it depends."

In theory we could stretch temporarily by paying less into our 401k. This would then be offset in a few years once we aren’t paying for daycare (approximately $1,800 a month). We are interested in finding a home where we can raise the kids and grow old (hence the interest in a single story), so stretching a bit now to make sure it meets our future needs is a big consideration.

We have swung wildly in both directions. In the past we have seriously considered houses with some land, and/or other special features and been willing to spend up to 30% above my desired budget. Other times I think it might be better to purchase a home we could afford on just one salary, to allow us a greater financial safety net (job loss, or stay at home mom/dad).

Over the last 6 months, my range has slowly evolved downward with the home and credit markets. Last year at this time we were looking at higher price ranges. However we didn’t quite have the 20% down for that range. So now with the credit tightening issues, and plentiful home choices, I have lowered my comfort range to the 20% mark.

All this to say, nothing is set in stone for us. Perhaps I am being a typical indecisive woman. But I also think it’s important to continually reevaluate one’s situation based on new information.

(And yes daycare really is that expensive.....if you think about it, its only around 5.50 an hour per kid....why college tuition gets all the press and special perks is beyond me.)

Tuesday, February 12, 2008

That Sentimental Feeling

With Valentine’s Day fast approaching, I thought it would be a good excuse to discuss buyer sentiment (and my latest conspiracy theory…see note at bottom).

There are many in the RE industry that mistakenly believe they merely have a PR problem on their hands (and not a speculative bubble). In other words, some have been quoted saying that the negative press has soured buyer sentiment. They have theorized that their problems would be solved if the media would just be a little more upbeat about things (and many have written positive spin pieces with that in mind….I find the latest NAR campaign absolutely nauseating).

If you are buying a home to live in, as opposed to an investment, is sentiment really driving your purchase? Back in the “priced out forever days” I can see how sentiment was a factor. But now that the market has cooled and prices have dropped a bit, the artificial sense of urgency has evaporated.

Ironically, now that there are plenty of homes in my price range, I feel even more compelled to wait, since I am assured that something reasonable is out there if I needed to purchase immediately (as opposed to last year at this time when there were only a handful of homes at or below my range).

I think sentiment comes into play in the decision to look or list a home. But sentiment will not save this market because it cannot actually purchase a home. Without access to piggyback, no-doc, ARM, or interest only loans, the spirit may be willing, but the financing gods may not be (although there does seem to be a lot of anecdotal stories to the contrary). And who actually has 20% down these days unless they have come from the Bay Area?

For the financially disciplined who actually have the 20% and the access to credit, their hearts and minds are not as likely to be swayed by NAR ad campaigns and Realtor spin.

A campaign to win back buyer sentiment?
So over the last 3-4 months I have started to wonder if members of the REIC (especially NAR operatives) have been posting on some of the RE blogs in an attempt to try and turn around buyer sentiment. While this might sound a bit far fetched, I think it would be a perfectly logical action to take if someone thought they had a buyer sentiment problem.

BT on conspiracy theories
I happen to love conspiracy theories. For instance I am still holding out hope that we will find out who really killed JFK and why, since very few can resist a death bed confession/memoire. The mastermind behind it should be getting up there in years right about now.

Monday, February 11, 2008

Losing Perspective

When I go on vacation, my RE obsession is always percolating somewhere in the background.

One result is that when I visit places I have been to before, I notice all the for sale signs now. I'm not sure if they were there before and I just didn't notice, or if there really are more signs and lots of empty commercial space. This past week was no exception.

We went on an actual vacation to Maui this last week as part of a family reunion. The Hawaiian Islands are home to some of the nation's most expensive RE....but there seemed to be for sale signs everywhere. Could it be that people are trying to offload expensive vacation homes? Or is it just the norm for that location and this time of year?

I feel I have lost my sense of perspective on what is a normal level of activity.

Saturday, February 9, 2008

Getting rich flipping houses

I love watching the flipper tv shows about how someone with no experience can quit their job as a hairdresser (no offense to hairdressers; just what the show was about), and without building permits, apparently without closing or transaction costs, and certainly without any waterproof backing behind the shower tile and stone that they all insist on, can make a trillion dollars in four weeks flipping a house.

Tonight, I saw a first for me. At the beginning of the show was a warning: "These are real people investing real money. You can lose money flipping houses." (Or words to that effect. The show was "Flip That House.")

I recently predicted to a friend of mine, only a little in jest, that with the slowdown in subdivisions being built, the construction defect attorneys will be out of work soon and likely shift their focus from suing developers and builders to suing real estate agents, appraisers and lenders, for not adequately warning purchasers that they could lose money buying a house.

Friday, February 8, 2008

Flipping in Cameron Park

In early 2007 I saw a notice of default on a house in Cameron Park (4310 Rancho Road). The owner had purchased years ago, then taken out a large chunk of money on a refi, but the minimum interest rate on the ARM adjustment was near 10% APR. He stopped making payments and lived there for quite a while, apparently "rent free." The bank auction was on July 13, 2007, at about $840k if my memory is correct. In about August 2007, it went on the market at $525k. I did a visual inspection for Mrs. Paul and myself, but passed on it. Within a week, it went pending on the MLS and apparently closed at $525k. It is now back on the market at $840k, and "pending" again at that list price. "Well built Custom Home/Equestrian Property , that has been refurbished,cleaned up and several years of neglect repaired." No mention of the buried underground fuel storage tank that I saw on the property when I did my inspection. I will never know if the flipper/seller discloses the tank or not, but simply don't understand anyone paying anything close to $840k (+$320 sq ft) for a 30 year old house that has no architectural style and is only 2,700 sq ft. True, its horsey property in a generally nice subdivision (5 ac minimums), but probably in the least desirable portion of the subdivision (freeway noise from US50, the second factor that caused me to reject it). Maybe we have hit a bottom?

Moral Hazard

There has been a lot of talk lately about “moral hazard.” Most commonly, I read about the purported moral hazard of the Fed bailing out the Wall Street banks. The conventional wisdom is, that if the Fed bails out the banks, the banks don’t learn anything and continue to engage in lending and investing practices that are risky at best, foolish at worst, and will lead to the need for more Fed bailouts in the future for some as-yet-unknown poorly performing investment.

When people buy homes and borrow the money to buy the home, they sign a promissory note. A promissory note is (or at least used to be) a legally binding contract between the borrower and the lender. The lender, in consideration of the interest it was to receive, promised the borrower to loan the money. The borrower, in turn, promised the lender that it would repay the lender pursuant to the terms and conditions of the promissory note.

In the past few years, lots of borrowers signed promissory notes with ARM’s. In the past three months, various politicians have been on their soap boxes pressuring the lenders to basically forget the written contracts with the borrowers, and freeze mortgage interest rates. At least one presidential candidate is apparently talking about a government mandated freeze on ARM interest rates for 5 years, and a moratorium on foreclosures. In other words, the government is telling the world that those contracts don’t really mean anything anymore.

So if the government is telling everyone that the borrowers’ contracts don’t mean anything any more, is it any wonder that it has become socially acceptable to “walk” on a real estate loan that has lost its appeal in an environment of declining real estate prices?

And if the government actually freezes interest rates on existing ARM’s (in contrast to its “encouraging” investors to freeze interest rates), is that a taking of a private property right requiring the government to pay the investor for the lost of interest? In other words, a government (read: taxpayer) paid bailout of borrowers?

Thursday, February 7, 2008

Hubris ...

This has been a week for many of you to express your opinions about where real estate prices are headed locally. (Cheer up! BT should be back this weekend!) You have read my “guess” that maybe we’ll return to the historical affordability levels or inflation adjusted 2000 prices. But what if I’m wrong? I’ll be the first to admit that I am merely guessing and everyone else’s opinion is at least as good a guess if not better than mine. Because buying a house is at least part investment, I try to analyze a house purchase just as I would analyze an investment and that analysis includes, no matter how convinced I might be about market direction and velocity, “What if I’m wrong?” (I was certainly wrong about the magnitude of the upside real estate price move from 2000-2005.) What if, we are near or at the bottom now? As one writer this week suggested, if we as “happy renters” are as arrogant as the folks who insisted that real estate prices would never go down, we are just as likely to be as wrong as they were. This isn’t about being vindicated by not buying “too soon.” It’s about measuring the marketplace to try and determine the best point to re-enter the market. And that re-entry point is different for everyone based on their personal goals and financial condition.

So I return to fundamentals. If the fundamentals suggest to me that the bulk of the price declines are behind us, I’ll start making offers. And I will continue to watch local inventories, average home prices, average days on market, price/square foot and any other meaningful evidence that is out there, to try to gauge when that time has arrived, rather than foolishly wait (perhaps forever) for my “guess” as to where home prices are going to go, to come true. And maybe despite evidence that prices are still declining, if the “perfect” property at the right price comes in my morning real estate email, I’ll still make an offer.

Wednesday, February 6, 2008

What inning are we in?

I apologize to the non-sports fans for the baseball metaphor, but I think it is apt. Some think we are near or at the bottom in part because of the recent Fed interest rate decreases. Some think we will sink to depression era lows. Will we drop from a 68% home ownership rate to the more historical rate of 64%? (This would mean that about 5.25 % of all homeowner’s now, will lose their homes and become renters.) As some of you already know, my guess, and I admit that is all it is, is that we will generally return to historical inflation adjusted prices and historical affordability levels. Both suggest a total decline of about 50% from our 2005 highs. If true, at least locally where we have seen price declines of about 25% already, to me that would mean we are in about the 5th inning. However, there is good historical evidence to suggest that a collapsing bubble will over-sell to the downside (past the historical mean prices) just as the bubble was over bought. Current prices reflect only one year of ARM resets (and the foreclosure of a lot of liar loans that most think were just equity scams to begin with), and we have 3-4 more years of resets left. Does that mean we are only in the second or third inning?

So my questions are: What inning do you think we are in now? While no one can know where we are headed in terms of real estate prices, what is your guess as to what statistical measure is most predictive of where prices will bottom? Or is the worst over with the Feds attempts to flood the market with cheap money? Or will politicians freeze resets for 5 years (more on this tomorrow) and save the day?

Monday, February 4, 2008

Where will the home buyers come from?

On an almost weekly basis, the NAR reports that there is evidence that the real estate market is “turning around.” For cynics such as myself who do not necessarily believe the NAR’s pronouncements, but nonetheless believe that someday, the real estate market will turn around, where will the buyers come from to make that happen? Typically, “new” buyers necessary to create a turn around, come from (1) move up buyers; (2) new household formation; (3) investors; and (4) immigrants (international and interstate).

As for move up buyers, until they can sell their homes (frequently entry level homes) to someone, they are not likely to be a significant percentage of new buyers. And depending upon when/where “the bottom” is, many folks who may not lose their homes to foreclosure, are still likely to have negative equity for years to come.

I have read some reports suggesting that as a result of demographic and culture changes, new household formations are not as robust as recent years. Specifically, one report stated that young males and females are devoting more time to college and career planning, and delaying relationships and new household formations.

I have read anecdotal reports that investor purchases represented 50% of the2007 home sales in Sacramento. I do not know how deep those investors pockets are (to keep buying up inventory), but I expect most of their purchase will be limited to entry level and lower priced homes. And if prices continue to drop, the homes the investors purchased in 2007 are likely to decline in value potentially discouraging the investors from more purchases. (Contrarians would say that we will only reach "the bottom" when all of the investors "capitulate.")

As to immigration, we are only likely to see immigration if we have plenty of good paying jobs to offer. The labor department reports a decline of 9,000 jobs in the Sacramento region over the last 6 months of 2007, and an increase in the unemployment rate from 5.4% to 5.9%. (I think many people underestimate the significance of a 10% increase in the unemployment rate in only 6 months time.) I suspect that due to declining property and sales tax revenue, we will see a measurable decline in local government employment over the next year or two. (I recently quizzed the staff in one Bay Area city. I was told that this particular city is looking at 8% budget declines this year, and “guessing” at 10% budget declines next year.)

Additionally, I think it is reasonable to conclude that lenders will be very slow to return to offering subprime mortgages. This suggests to me that all of the millions of families (nationwide) who have lost or are likely to lose their homes to foreclosure, will have credit ratings that will negatively impair their ability to re-enter the home ownership market. And if lenders actually require buyers to make a down payment (What is this world coming too? A down payment?), this is likely to further reduce the number of potential buyers.

Those of us who fall into the “happy renter” category are ready to pounce when the prices appear to be near a bottom, but statistically, I don’t think there are enough of us to turn the market around.

Where do you think “new” buyers will come from for us to have a turn around in the local real estate market?

Sunday, February 3, 2008

What’s going on out there?

In 2005 I saw a SFH listing in Cameron Park in the low 500's. Modest house, nice view lot, swimming pool. Someone else bought it in 2005 for more than the listing price ($540k to be exact).

I had an interest in the house because I liked the location, so when the notice of default showed up on the foreclosures last year, I started monitoring it. The bank finally took the property back in December 2007, and listed it for under $400k. Still having an interest in the property, but not wanting to appear anxious before I submitted an offer based on my guess as to where I thought the “bottom” might be in a year or two, I waited until the property had been on the market for over a month. When I saw an article in the Wall Street Journal about the lending bank’s earnings declining 98%, I thought maybe it would be a good time to make an offer on the house with a quick close date. So I called my friendly real estate agent (she has been my agent for 18 years and we have become friends). I asked her to do some preliminary research. Specifically, review the listing history, call the prior and current listing agents and ask about disclosures and problems with the house, as well as availability.

Here is what she reported to me later that day: An initial offer was accepted and the property went pending. But FHA wouldn’t insure it, so the buyer cancelled. There were two new offers pending, and a third on the way, according to the listing agent.

Most interesting to me: There was pending litigation between the 2005 buyer and prior seller over roof leaks and mold.

So my wonderful agent knows me, and she knew I would run, not walk, from a house with mold litigation and stigma, so she wasn’t surprised when I thanked her for her time and offered to buy her lunch while we waited for the next house to come along.

And it got me to thinking. With such a massive inventory of homes out there, who would buy a house with mold problems, unless the price was significantly discounted? Who would get into a bidding war over such a house? It's not that great of a house or location. And even then, could they ever get homeowner’s insurance for the house? (The insurance companies maintain and share a database of properties with prior mold claims.)

Saturday, February 2, 2008

Is it just me, or ... ?

I apologize that this is a little off topic, but it’s Saturday and I just can’t understand this.

From today’s (and recent days) Wall Street Journal: The rating agencies (S&P, Fitch, etc.) rated some of the subprime, Alt-A and prime mortgage backed investments, as “AAA” investments, the highest possible rating. Monoline insurers like Ambac and MBIA, wrote insurance policies guaranteeing the credit quality of some of the mortgage backed investments. The rating agencies, in turn, gave “AAA” ratings to the monoline insurers. With AAA ratings on both the underlying investments and the insurance companies, investors all over the world (Citibank, UBS, Deutsche Bank, Bank of China, Sumitomo Bank, etc.) bought the mortgage backed investments.

As we all know now, Murphy’s Law prevailed over the mighty computer models of Wall Street, and mortgage backed investments have tanked. So, somewhat belatedly, the rating agencies are lowering the ratings of many of those mortgage backed investments. Each time a bank’s mortgage backed investment receives a lower rating, the bank would normally reduce the value of the investment on the bank’s books. Thus, the massive write-downs we have seen recently on Wall Street. This has also increased the exposure of the monoline insurers to potential claims, and the rating agencies are lowering the ratings of the insurers (or threatening to).

Now, to prevent another $70 billion in bank write-downs that might arise if the rating agencies lower the ratings on the monoline insurers, the banks are working on a bailout plan (the banks call it “recapitalization”) of the monoline insurers. One of the tentative plans is for the banks to invest about $1 billion in MBIA to increase its capital. So in other words, the banks are investing $1 billion in the monoline insurers to prop them up so that S&P doesn’t lower the insurers’ ratings and the banks don’t have to take $70 billion more write-downs.

Now, from the banks perspective, investing $1 billion to save $70 billion is cheap insurance, but if the mortgage backed investments are really worth $70 billion less (without AAA insurance), how is an extra $1 billion of insurance going to really make a difference against $70 billion in claims? I’m just an average guy on the street and this doesn’t pass the smell test for me, yet it appears that the SEC and Federal Reserve are okay with it.

Friday, February 1, 2008


Paul has graciously agreed to watch over the blog next week while I am on travel. So go easy on him....good help is hard to find (especially when there are no wages involved).

February 2008 Good Buys & Offers

Please post homes you think are a good buy or any offers you know of that were accepted, especially to builders. It will help give others negotiating leverage when they are ready to buy. Even just letting people know what type of builder incentives they can expect would be helpful since its hard to tell if they give everyone the same incentives.

On a personal note, I have been seeing many more "reasonable" buys lately....but we try not to drag our Realtor out for a showing unless Mr. BT & I are willing to put in an offer. So I don't have a lot of intel on properties lately (just the occasional open house). Which means most of my assessments are based on the data I find online and some drive bys.

Pieces of data to include: Zip Code, MLS or Development Name, List Price, Incentives, Offer (if any), house details (sq ft, garage size, lots size etc).

Feel free to post info for homes anywhere in the Sacramento Metro area. Just cause I tend to confine my search to the Gold River, Folsom, El Dorado Hills, Cameron Park areas doesn't mean others have to.