One Last Attempt in 2008

A new home, we had our eye on last summer, fell out of escrow this month. It is priced competitively, given current interest rates, as is the other local development we had our eye on (even with all the extra monthly fees and taxes). It was a bit of a difficult decision, but we figured we would go with the higher priced home since it best meets our needs.

So we put in our first offer on a new home in a development (last year's offer to a builder was not in a new home development, it was more of a one off type deal). Our offer was only 5% below asking, so I don't feel we are being unreasonable. After all, they already received a 5k deposit on it from the previous buyers, and if we had come in with our realtor the first time we visited, they would have given him 5k as well.

So now we wait.

(The part that was most disconcerting about this offer process was, they didn't care/ask or want any documentation about the financing, like what our credit is, or if we have any money down etc., all they really wanted to know what what price we were putting an offer in at.)

Nov-Dec 2008 Month's Inventory for Sacramento Metro Area

Well, I couldn't help myself, I gathered inventory data for the Sacramento Metro area this month. Below is a comparison of this year versus last year. Month's inventory is way down. For most zips its below the 6 month mark, which is traditionally heralded as equilibrium.

Yet, if we are truly at equilibrium, prices should not be dropping at a double digit pace. So this leads to my big question...is 6 months inventory still equilibrium? With few buyer's who can qualify for loans, I am inclined to think that 4 months is the new 6 months.

Data is sorted by the change in month's inventory from year to year (third column). Inventory data is collected from ZipRealty for single family homes, and the resale data is from DataQuick via the SacBee.

Hope everyone had a happy and safe holiday.

Articulating 2009

Here is a link to the round table story in the Sacramento Bee.

I sound "kind of" very inarticulate, as if I can't complete a sentence properly. I will chock it up to all the drugs I was taking at the time for my cold (knowing full well that I totally overuse that phrase). This is why I feel for all the politicians and celebrities whose every word is subject to public scrutiny. It takes a lot of practice to be articulate all of the time. Luckily for me, I can revise and spell check.

For those who might be finding this blog for the first time....here is a link to my slightly more articulate comments, as well as the comments, predictions and insights of others who watch the market with me.

I think the comments over at the Sac Bee have already started shredding everyone involved (some deservedly so.....but I will refrain from commenting more than that).

November 2008 - Folsom and El Dorado Hills

It's been a couple months since I last posted the historical price and sales volume data. Below are the charts updated with the November 2008 data.

Note that the DataQuick/SacBee data is resales only, and the Melissa data likely includes new homes.

Speaking of homes, with Christmas fast approaching, I thought Santa might need a gentle reminder, that my wish list hasn't changed much. Unfortunately it went unfulfilled in 2008.

California Here I Come....

Just another, of the many many reasons we moved back to California......

The University of Michigan compiled a list of metro areas based on their cooling and heating demand (the less demand, the better the rank). Sacramento was ranked 6 out of 50, only to be beat out by other cities in California (hat tip WSJ Developments blog).

I would hate to think of what my utility bill would look like if we were ranked 50! Of course "demand" and costs are not always related. Just look at the difference between PG&E and SMUD.

A realtor, a broker, a builder, and a buyer walk into a room...

As some of you have already surmised, last week I attended a real estate round table hosted by the Sacrament Bee.

A quick caveat before I make some observations, the investor/bottom caller dropped out with the flu (probably not a bad thing as he was likely to get beat up). I was on the verge of dropping out, having come down with a mutant form of Strep on Monday. But I washed my hands thoroughly and pressed on, in a heavily drugged state (antibiotics, Advil, and decongestant). So needless to say I am not sure my arguments were coherent, let alone cohesive.

Overall, it was a very civil, and lively discussion, with each person bringing a unique viewpoint to the table (an agent, a broker/credit, a building consultant, me, and several from the Bee). Without divulging the details, the story is supposed to run in next Sunday's paper, I wanted to make a couple of observations.

This group has hindsight clearly in their favor. Back in late 2006/early 2007 I couldn't find a RE agent (and we looked hard) that would tell me a home was overpriced, nor could I find a broker who would only give me a quote for a 30yr fixed loan (2 other quotes that lowered my monthly payment always seemed to come with it). So its interesting to see how history gets revised. Of course I didn't know these particular individuals at the time, so I can't say for certain.

Early in the conversation the effect of lower interest rates came up (and whether it would stimulate more demand). So I threw out a somewhat standard line, that a smart buyer would wait till prices decreased further, thus paying taxes on lower principle, because they can always refinance when interest rates move lower. Idea being, you can always lower your interest rate, but not your principle. This idea went over like a lead balloon. Perhaps I didn't phrase it properly?

At one point in the conversation the mortgage/credit guy, Michael, suggested I was throwing away money by renting since there are tax benefits to owning. We have discussed this before, and basically agreed that tax benefits merely defray some of the many additional costs associated with owning a home (insurance, property taxes, HOA, Mello-Roos, maintenance). I include the tax benefits in my rent/buy calculations, at current prices, we are way still better off renting than purchasing a comparable home.

When I let on that I had 20% as a down payment, realtor Ruben, seemed to think the world was my oyster. Unfortunately, this has not been our experience. 20% down, and no contingency (no home to sell first), doesn't seem to make a lick of difference when we present our offers to a bank or builder.

Of course, the "when is bottom" question came up. And while I did give an answer (over a year away with no appreciation for some time...but the price declines will moderate considerably as we approach bottom) there was no time to get into the discussion of how different areas of the city will bottom at different times. This is a finer point, but one that I like to emphasize since it is important for buyers.

In all it was an enjoyable discussion (and that's not just the drugs talking), and as an added bonus we were led on a tour of the newsroom. I'm a bit anxious about reading the comments when the piece comes out, some of the people who comment on Sac Bee stories are super angry mean. So much for "love thy neighbor."

Short Run Solutions

As Keynes was quoted as saying, "In the long run, we are all dead." With that in mind, lets look at the short run. Right now interest rates are at the lowest level I've seen since I started tracking them. Compared to rates earlier in the year, current rates could lead to almost $300 savings a month given our specifics.

In the short run, low interest rates are great for everyone. Buyers pay less each month, or can afford more house for their money. Home owners with ARMs, who are not already under water, can refinance into a low fixed rate mortgage. Thus low interest rates both increase demand, and help lower the distressed supply.

Lest we forget, low interest rates were one of the culprits fueling the housing bubble. Longer term, we will still have to ween ourselves from our low rate addiction, leading to the economic shakes. (I know some of the hardcore econ folks tackled this issue, but I had a sick kid all week, so no time for reading up).

With all the $$ being thrown around by the fed, inflation is bound to kick in, thus interest rates will inevitably be raised. Once again, we will be faced with housing market problems as demand dries up, but hopefully by then, all the toxic loans will be out of the system (either through refi, modification or foreclosure) leaving us with a slightly less onerous housing downturn.

Average Buyer's Crystal Ball

Being the ever opinionated person that I am, I was asked to participate in a year-end forum on the Sacramento housing market. I’m sure one of the big questions on everyone’s mind will be: “What the future holds in store for our metro area.”

With that in mind, I would love to hear everyone’s predictions if they dare*…..for the 1 year mark and 5 year mark. Here are some of mine (I did my best to keep it short):

1 Year – As banks complied with the legislated wait period in California, new NOD activity slowed to a crawl in the fall of 2008. This means the pipeline of foreclosures will temporarily dry up sometime in early to mid-2009. Together with inventory down significantly, this should lead to stabilization in prices for at least a couple months. But slowed economic activity and job losses will take a toll on the local economy. Excess housing inventory and frustrated sellers, will keep downward pressure on rents. As a result, by the end of the year home prices will continue their downward march, eventually surpassing what I consider affordable/sustainable levels (based on historical price/rent ratios and income).

5 Year –The economy will experience the deepest slump since the Great Depression, as consumers and companies undergo painful deleveraging. The Sacramento market will not be spared. However its housing market will stabilize before the rest of the country, as home prices have dropped the hardest and fastest here. Our local economy will also recover sooner than others, buoyed by relatively stable government employment, and a stabilized and affordable housing market. In terms of time lines…..next year home prices will level off then continue to fall to affordable levels, with years 2-4 seeing no increase, and perhaps single digit decreases, in prices as excess and distressed inventory are absorbed. Finally in year 5, modest appreciation will be possible as the housing market and local economy eventually find their footing.

Unfortunately I see no end in sight to the economic troubles our country is facing. Of course the big wild card in all this is the government’s response, which can drastically change the timeline, but not necessarily the forestall end result. I do however consider myself optimistic on our local housing market. I know of several first time buyers getting into the market now distressed inventory has made select areas of Sac accessible (note that I used the term accessible and not affordable).

*Making public predictions is a pretty tough gambit, as we have been through quite a roller coaster this last year, between wildly fluctuating commodity prices, a change in administration, and the demise of the investment banking industry, it’s hard to imagine what the future has in store for us.

Tribute to Tanta

I was deeply moved yesterday to read that Tanta had passed away (she is a co-blogger at my favorite non-local blog, Calculated Risk).

So young, smart and witty. I will miss her.

A reminder to us all, to cherish our time with friends and families.